Would you be happy with a 12% yield on your investment over the next five months? Who wouldn't in this crazy market.
Here is how you can lock in a double digit yield with virtually no risk. What your doing is buying a stock and selling it immediately at a closing date in the future. Between now and the closing date, you get the dividends. It is that simple.
As an example we use EVEP: On Monday you can do a few trades to lock in 12%:
Example assumes 1,000 shares are acquired
$34,350 < Buy EV Energy Partners, LP at $34.30/per unit
- 9,450 < Immediately sell Dec 2010 $25 (strike price) Covered Calls
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$24,900 < This is your net cash outlay
$ 3,020 = EVEP's annual dividends
12.1% = Annual yield on your net cash outlay
If you do nothing the shares will be called at $25 mid-December. If you pay attention you can continue to roll forward the Covered Calls position a few days before the strike date. [NOTE: Your stock can be called before the strike date but that is no big deal. All you do is set it up again.]
EVEP is a high quality MLP with very consistent dividends. In fact, they have a very high percentage of their production hedged so there is little commodity price risk here. MLP's are partnerships so you will get a k-1 at year-end but that's no big deal. The good news is that a large portion of the distributions are tax free return of capital. I will take a higher after-tax yield for a small hassle at tax time anyday.
There are several high quality large-cap MLP's that trade options. KMP and LINE are two others to take a look at for this strategy. KMP is a midstream MLP which means lower risk but you do give up 3% to 4% on the yield. You can also do this with the large-cap Canadian Royalty Trusts like BTE, ERF and PWE.
Dan
Lock in high yield with an MLP
Lock in high yield with an MLP
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group