You’ll have to take risks to become wealthy, but how much risk is enough? The answer depends on many factors, the chief of which is your emotion toward money.
I absolutely adore preferred shares; however, I must take a gamble to get the best deals. Selling cash-secured puts is relatively safe, but there is a chance I may inherit a falling dagger (a bad stock).
Today, I want to compare two strategies: one derived from income investing (preferred shares) and the other from options trading (cash-secured puts).
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But first, let’s discuss why you should even consider high-yield investing strategies in the first place. Many people are okay with receiving 4.5% yields on their high-yield savings accounts. Why take any risk greater than this? Let’s begin.
The risk of not taking risks? Most people feel that working their job is more secure than being an entrepreneur, and perhaps they have a point. But what if they lose their job? Do they have the skills to make money on their own?
As an entrepreneur, I have learned to write, edit, publish, create, design, and market my website, articles, and books. Although I haven’t made a lot of money as a business owner, the skills I have learned are invaluable (and much different from my career in the Marines).
We should have the same awareness when it comes to our money. We must be able to earn high yields in any interest-rate environment.
Currently, the US Federal Reserve has set interest rates at 4.75 – 5.00%, which means our high-yield savings, certificates of deposit, treasury bills, and money market funds are generating some good cash flow.
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But what happens when the interest rate drops to 2%? Do you know how to generate 10% annual returns from your capital?
This scenario is why it is imperative that we learn how to generate our own yields. We need the ability to look into the markets and grab the income we need to build wealth, generate cash flow, and protect capital (as best as we can).
The magic of preferred shares. I have loved preferred shares since I read “The Billionaire’s Secret” in October 2020. Preferred shares are set between bonds and stocks on a company’s capital stack.
The best part about preferred shares is that they fall under the “fixed income” category. When you purchase a fixed-income product, you know how much income you will receive when you make the purchase.
For example, let’s say AT&T (T) creates preferred shares that cost $25 and pay $1 per year in annual income—a 4% yield. If you can purchase the same preferred shares at $20, your yield would be 5%.
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The magic of preferred shares is that you know exactly what you are getting for your price. Therefore, if you can find a bargain, it can sustain your income for years to come.
The favorite preferred share purchase of all time. In October 2020, I bought a preferred share called Gaslog Partners C (GLOP.C). I purchased 22 shares for $325. Currently (October 2024), the shares are worth $560.
More importantly, the shares yield $60 in income annually, or a yield on cost of 18.5%. So far, GLOP.C has paid me $188 for the honor of being a shareholder. If the company called my shares today, I would have made $423 in profit above my original investment.
The tricky part of purchasing deeply discounted preferred shares is learning about the company. Trust me; I have had preferred shares go to zero, and these were some of my favorite ones.
Therefore, the skill of preferred share hunting is finding deeply discounted bargains from companies that the market has mispriced. Learning to build faith in these companies will take some work.
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The magic of selling cash-secured puts. Selling cash-secured puts is on the opposite end of the risk spectrum than preferred shares. Whereas you want to purchase preferred shares for longevity, you truly don’t want to hold the shares from a put.
Selling a cash-secured put consists of holding enough money in your brokerage cash pile to purchase 100 shares of a company. You set the put’s strike price, and if the share price drops below the strike price, you win the shares.
The key to selling covered calls is only trading shares you won’t mind owning. You do not want to wake up with 100 shares of a company that you are afraid will go to zero.
Let’s say Rivian’s (RIVN) stock price is $10. I personally love RIVN and have a positive long-term view of the company. I would need to have $900 in my account to sell one cash-secured put at the $9 strike price.
If the price crashes to $8, I would wake up with 100 shares of RIVN at a cost basis of $9, with a negative $100 capital gain. The risk of selling cash-secured puts is being upside down.
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However, since I love RIVN’s long-term prospects, I would be happy to get shares at $9. I could hold these shares until the price recovers and then start selling covered calls.
Things can get hairy when trading a large amount of cash-secured puts. For example, let’s say I sold ten cash-secured puts at the $9 strike price. I would need $9,000 sitting in my brokerage. If the price crashes to $8, my $9,000 in shares would be worth $8,000.
It’s not fun to be upside down on shares by $1,000. So, the best way to play the game is to set the strike price low enough that it won’t get assigned.
As you follow a couple of stocks throughout the year, you can understand when the price is low or high. There are some outliers, but you’ll get a sense of the price action for the most part.
A good rule of thumb is to sell a cash-secured put after the price crashes 5% in a day or two—that way, you are selling puts at an already discounted price.
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The price of yield. As you can see, you will need to understand the markets to earn yield. Sometimes, fixed income is repriced based on interest rates. That means the entire fixed-income market will reset or gyrate based on treasury prices.
You may find a few preferred share deals in the chaos. This situation is much different than when a company has bad prospects and the common stocks and preferred shares crash out. You need to understand the difference between a market event and a company share price drop.
Similarly, there are days when the stock market drops 2% in a day due to bad economic data, such as the jobs report or housing availability. Your favorite stock may drop in price, which has nothing to do with the underlying business.
Conversely, your company may be heading for disaster due to poor earnings or a new competitor. You may sell a cash-secured put, but the price drops far below your strike price, and your company’s price may not recover for a year.
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The moral of the story is that cash-secured puts and preferred shares both deal with dropping prices. You want to understand why the share price is dropping and how you want to make a play.
Conclusion. You can start your journey with cash-secured puts and preferred shares with big companies that are relatively stable. Companies like AT&T (T) and Bank of America (BAC) have preferred shares and cash-secured puts.
The yields on BAC preferred are around 5.2%, which is excellent for such a stable company. Likewise, you won’t get high premiums on their cash-secured puts either.
But what you don’t earn in yield, you get in safety. As you maneuver in the stock and options markets, you’ll learn that the more risk you take, the more yield you earn.
You’ll have to be able to balance your risk profile with your own situation. I like preferred shares because you can jump in for $20 to $25. You’ll have to risk much more to sell cash-secured puts. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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