Two weeks ago I began writing about designing a $500,000 retirement strategy for people in IRAs or 401Ks that would produce $50,000 per year of current income while maintaining the principal. I said that I would put $200,000 into relatively safe bond funds that were paying about 6% interest and then create three $100,000 stock portfolios with the remaining $300,000.

I used a variation of the Vector + Vector Strategy to create the first $100,000 portfolio and named it, "High VST+YSG Stocks." Last week I created a Strategy called, "High Yield 2x10s," which finds stocks that pay at least a $2.00 per share dividend and Yield at least 10%. You may find both of these Strategies in the UniSearch Tool located in the Strategy Group called, "Strategies - Retirement."

So far I'm positioned to earn $12,000 per year of current income from my $200,000 investment in a relatively safe bond Fund, and I believe I can make $15,000 per year from a $100,000 portfolio of High VST+YSG stocks by selling Covered Calls. I hope to also make at least $11,500 per year from a $100,000 portfolio of High Yield 2x10s stocks. So now I need to find a way to make at least $11,500 per year from the final $100,000 that I have to invest.

I believe the surest way of doing this is by selling Covered Calls on high yield stocks. Basically, I'm going to combine the techniques I plan to use in managing the two $100,000 portfolios described above to produce this income. So I created a third strategy which a call "Optionable 2x4s." This strategy finds optionable stocks that pay at least a $2.00 per year dividend and Yield at least 4%. It is sorted by VST+YSG Desc., but that doesn't really matter because of the way I'm going to use this portfolio.

What I'm going to do, is use the Option Rate of Return Tool found in Unisearch to find stocks with juicy dividend payments and juicy option premiums. Moreover, I'm only going to trade stocks with the highest rates of return. For example, I clicked on Research on the Main Tool Bar, clicked on Option Rate of Return in the Drop Down Window, adjusted the settings to the Nov Expiration Date, 1 Strike Out of the Money, selected my new strategy, "Optionable 2x4s," clicked on the Run Search button as of 10/01/09, and sorted the results by Option ARR.

Macerich, MAC, came to the top of the list with an Option ARR of 54.39% and a $2.12 per share Option Price. So I highlighted the stock and clicked on View Stock News. This took me right to Yahoo!Finance where I was able to click on Options. It defaulted to October data, so I clicked on Nov 09 and saw immediately that the $30.00 strike Call options were trading between 1.90 and 2.10 per share, which was close to what I got from VectorVest.

I then clicked on Key Statistics and scrolled down to the lower right hand corner of the data sheet and saw that the most recent dividend payment was made on September 20th. I had just missed the most recent dividend payment. So I repeated this process on the next stock, which was BRE. Once again, I just missed the dividend payment. Actually, I should be looking at the Ex-dividend date because I would have to own the stock on or before that date in order to be eligible to receive the dividend.

Unfortunately, all the stocks I was interested in had recently paid their dividends. But that doesn't discourage me. Once I get into the rhythm of trading these stocks at the right times, it will start working out just fine. Incidentally, the only stocks that I'm interested in trading with this strategy are those showing an Options ARR of 25% or more with an option premium of $2.00 per share or more.

Now that I have completed the plan for investing the $500,000, there's a whole lot I need to say about implementation. I will cover the subject in some detail next week, but I will say this. My first caution to you is to stay on the right side of the market. There's a real danger of forgetting to properly manage your stocks when you're focused on capturing dividends and option premiums. I've made this mistake myself and I can tell you that the profits you'll make from dividends and option premiums, no matter how juicy, can easily be outweighed by the money you'll lose on a stock that's heading south. This is especially true when you're going after the Double Juicy.

CHERRY PICKING STOCKS FOR JUICY CURRENT INCOME.
Last week we learned how to generate extra income from dividend paying stocks. This week we are going to take that technique to a new level. Mr. Glenn Tompkins, Manager of Internal Training, will show us how to not only find stocks with juicy dividend payments, but cherry pick those with the juiciest option premiums. It makes my mouth water just thinking about it. So join Mr. Glenn at the VectorVest University to see this week's "Strategy of the Week" presentation: "Cherry Picking Stocks for Juicy Current Income."

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.