Last week I introduced the subject of generating cash from your stock portfolio. Not only is that a worthy goal, but I've read that dividend paying stocks outperform the market by 1% to 1.5% per month during downturns. This sounds reasonable to me. Why would someone sell their dividend paying stocks if they could make 20% to 30% a year even in a bear market?

Let's see how this might be done. First of all, we need to find an acceptable dividend paying stock. We can do this by simply accessing Stock Viewer and sorting by YSG Desc. As of yesterday, Thursday, 09/04/08, Cal-Maine Food, CALM, was in the top spot. Although it now has an "S" rating and I wouldn't buy it at this time, I want to keep my eye on it because it's making a ton of money and has an excellent Dividend Safety, DS, rating of 87. So let's use it as an example.

CALM closed yesterday at $34.50 per share and is paying cash dividends at the rate of $2.06 for a yield of 5.97%. If I were to buy these shares on margin, the effective DY would be twice as high, i.e., 11.94%. Of course I would have to pay interest to my broker on the borrowed funds, but the interest expense is tax deductable. Although I'm already looking at a juicy return, how could I get more? I'd sell some out-of-the-money Covered Calls. Yahoo!Finance shows that CALM had its last ex-dividend date on July 28, 2008, so I'd assume that its next declaration will be made in late October. Therefore, I'd be selling the November 40 Covered Calls, which are currently trading at $1.75 per share.

Here's how this trade would work: I would buy 100 shares of CALM on margin for about $1,725.00, not counting commissions or interest and I would sell one CALM November 40 Call Option @ $1.75 per share. My account would be charged $1,725.00 for buying the stock and be credited $175.00 for selling the option. The net charge would $1,550.00 not counting commissions or interest. Around the middle of November, my account would receive a dividend credit of about $51.50. The total income from the sale of the Call Option and receipt of the dividend payment would be about $226.50. This would give me a quarterly return of 13.1%. If I could do this four times a year, my annualized rate of return would be 52.5%, not counting commissions and interest.

This sounds great, but there are several other things that can happen to this trade. For example, the stock's price could rise prior to the ex-dividend date and the stock could be called at $40.00 per share. Although I wouldn't get the $51.50 dividend payment, I'd make about $500 on the stock and get to keep the $175 option credit too. This is not a bad deal.

If, on the other hand, the stock's price fell, I'd have to make some decisions. I could hang on to the stock, collect the dividend and option premium, and repeat the process again the next quarter. But that's no fun. I usually buy back the Call Option at a much lower price than I sold it for; then get more income by selling another Call Option at a lower Strike Price. This technique invokes the risk of getting called out of your stock at a price lower than your purchase price, so I suggest that you practice it with only small amounts of money before using it with serious money.

Incidentally, did you know that most of the market's historical gains have come from dividends? Maybe you've heard that selling covered Calls was the most frequently used option trade. Both generate income. Put them together and you have the Cash Machine, Part II.

P.S. Terra Nitrogen, TNH, closed up $8.51 today and is up over $14.00 since I mentioned it last week.

When interest rates began dropping about 15 years ago, Grandma became dismayed over the puny interest rates she was offered on CDs. She depended upon interest income to live comfortably and needed to earn more than three percent on her money. So she asked me to suggest some safe stocks she could buy that paid juicy dividends.

Up to that point in time, I was totally focused on buying stocks for capital appreciation purposes only, but I agreed to help her. After thinking about her situation, I created the VectorVest Dividend Advisory. This service was designed to analyze, sort and rank stocks for dividend yield, safety and growth via the VectorVest Yield-Safety-Growth-Vector, YSG-Vector. When VectorVest ProGraphics was released in 1995, the VectorVest Dividend Advisory was included as part of the package. Unfortunately, this part of our service just doesn't get the attention it deserves.

You can make a lot of money on the stocks you own even if their prices don't go up. You just have to know how to do it. The first thing you need to do is pick good, dividend paying stocks. You can do this by accessing Stock Viewer and sorting by YSG-VECTOR, Desc. Note that as of Thursday night, Terra Nitrogen was the highest ranked stock. Wow, it's paying annual dividends at the rate of $14.52 per share with a yield of 12.08%. Great, but its Dividend Safety, DS, is only 45 on a scale of 0 to 99, and that's lower than I usually like to see. So what's next?

Cal-Maine Food, CALM. It's paying only $2.06 per share, but has a Dividend Yield, DY, of 5.10%. That's not bad and it has a DS of 87, which is very good. Now, how could you collect twice as much in dividend payments from this egg seller?

The easiest way to do this is to simply buy twice the number of shares. A lot of people don't know it, but they can double the number of shares they own by using a margin account. With a margin account, your broker will lend you the money to buy the additional shares of stock. Of course, he'll charge you interest on the loan, but that expense is tax deductable. Moreover, you don't have to buy the same stocks you already own. You can buy any stocks you wish. So why not buy stocks that pay higher dividend yields than the ones you already own? You might even be able to triple your dividend receipts. But hold on, there's more you can do to put those stocks to work for you.

Believe it or not, you can usually receive more money on a quarter-to-quarter basis by selling out-of-the money covered Calls than you can from receiving dividend payments. If you know how to trade options, try it. If you don't trade options, I'll try to explain this trade next week. If you buy dividend paying stocks on margin and sell out-of-the-money Covered Calls, you'll have a Cash Machine.

I met a lot of people at the recent Money Show in San Francisco who own stocks that are way down from their recent highs. Unfortunately, they did not take profits or protect their positions when the market rotated on the sharp 23% drop in crude oil prices. What could they have done to avoid this problem?

First of all, you can't fall in love with a stock and you can't worry about paying taxes on your gains. This means that you should always have an exit price in mind. VectorVest helps you in this regard with its Stop Prices. You can use them either as gospel or as a guide, but don't ignore them. Yes, I've heard every complaint imaginable about our Stop-Prices, stuff like they're too high, too low, too fast, too slow, so I challenge anyone to come up with a better one. See my essay of January 17, 2003.

If you were reluctant to sell a great stock, such as Potash Corp., POT, when it got an 'S' rating a month ago, what else could you have done to protect your profits? The answer lies in our Strategy of the Week, "Protecting Profits," which was first presented on March 31, 2000. It was presented again and again on the following dates: 06/08/01, 12/28/01, 02/27/04, 07/14/06, and 07/20/07. The 07/20/07 presentation is on the VectorVest University.

It's interesting to note that four of the eight techniques given in the Protecting Profits strategy involves the use of options. Remarkably, most of the people I talked to at the Money Show did not know how to trade options. That's too bad because they could have saved a lot of money with some simple option trades. Yes, the option trades I'm talking about are simple, but they aren't necessarily easy to understand. So you really need to know what you're doing when you trade options.

I learned how to trade options by reading, reading and reading. I must have read 30 books, all of them very boring, before I felt like I really knew what I was doing. And I took some very expensive courses, also very boring, before I felt comfortable making large options trades. After several years of trading, I felt that I had the knowledge and experience to write an options course that was as good as or better than any other course you'll find anywhere. The key to the VectorVest Options Course is that it takes nothing for granted. It starts with the basic definitions of stock options, the two types of options, Calls and Puts, and teaches over thirty option strategies from simple to complex, step-by-step. It's perfect for investors who want to learn how to trade options from the ground up.

Once you learn to trade stock options, you'll know how to keep the stocks you love and not lose money even if they go down. It's like having your cake and eating it too. When a good stock goes south, use options to Ease the Pain.