Call it the "Summer of Pain." All the major indexes are down for the year, flirting with textbook "correction territory."
The trouble is, the utility sector is a massive favorite among income investors, thanks to its stability and generous yields. XLU, for instance, pays close to 4%.
And that has a lot of investors – particularly conservative income investors – nervous.
And the simple play I'm about to show you will make sure you get paid all year while taking the bite out of some of the downside risk.
Dates to Know for This Strategy
As I mentioned, it's the attractive dividend yields that, at the best of times, make utilities and XLU so popular with investors.
It's easy to see why: You don't have to worry about timing the markets. You just need to pay attention to some key dates and collect clockwork profits.
There are four important dates to watch out for:
- The Declaration Date is when the dividend payment is announced by the company.
- The Ex-Dividend Date is when you must own the stock in order to receive payout.
- The Record Date shows an accounting of all shareholders on record to receive a payable dividend.
- The Payable Date is the big day, when the dividend is paid out to shareholders.
As a long-term income strategy, this is tough to beat. But, as we've seen with XLU, the problem is that stocks are dropping faster than a year's worth of dividends can cover.
Now, there are two ways to deal with this problem.
One approach (call it the "Daddy Warbucks" strategy) is just to buy more and dollar-cost average into the position.
That's fine if you're rich, but for most investors and retirement savers, spreading risk means not putting too much capital to work in any one stock or sector.
But there's a better way to "juice" those returns without adding any more capital to the trade…
Our Play: The Classic Covered Call
We can reasonably expect utilities to rebound – and nicely, at that – over the course of the next year. As I said, utilities aren't at risk of going bust anytime soon, and economic conditions prevailing in the United States right now are telegraphing better, not worse, times ahead for these companies.
This is a classic, easy-to-make options trade. We'll sell a simple call option on shares we already own to bring in additional income throughout the life of the option.
This is simply the best way to increase the probability of success even as we slash our risk.
About the Author
Tom Gentile is one of the world's foremost authorities on stock, futures and options trading.
With more than 25 years' experience trading stocks, futures, and options, Tom's style of trading systems and strategies are designed to help individual investors propel themselves past 99 percent of the trading crowd.