Ideas to get 5-6%

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
User avatar
Nate79
Posts: 9373
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: Ideas to get 5-6%

Post by Nate79 »

investuntilimrich wrote: Sun Jun 20, 2021 10:40 am I saw a couple of mentions of fundrise, I put in the minimum 1k as a test about 6 months ago. So far it has $41.50 in appreciation and just over 6$ in dividends. I don't have an opinion on this product, I just plan to stay at the minimum and I'll check back on it in 5 years and see how it's done and go from there.
Yes, I've written a number of reviews of my experience with Fundrise and this would be my recommendation.
User avatar
TinyElvis
Posts: 324
Joined: Mon Jul 27, 2015 2:33 pm

Re: Ideas to get 5-6%

Post by TinyElvis »

ryanbohle wrote: Sun Jun 20, 2021 11:32 am
TinyElvis wrote: Sun Jun 20, 2021 10:19 am I have decent-sized chunk invested here earning 8%:

https://pprnoteco.com/invest/current-fund-offerings/
Now this is what I’m talking about! How does this risk compare to just a private REIT?

Rya
I don't have any experiences with REITs to be able to compare. If you are interested, I would reach out to PPR and talk with their investor relations team. I've been quite happy with my investment over the past 2+ years.
"Give a cat a fish and it will eat for a day. Teach a cat to fish and it will just sit there waiting for you to give it a fish."
LearnMarket
Posts: 17
Joined: Tue Jun 16, 2020 4:53 pm

Re: Ideas to get 5-6%

Post by LearnMarket »

Risk can be controlled through stocks to bonds ratio. If you want to reduce risk increase bonds and if you want to increase risk for the possibility of higher returns increase stocks in the portfolio. You can create the new form of asset by adjusting composition of the portfolio.
gougou
Posts: 1317
Joined: Thu Sep 28, 2017 7:42 pm

Re: Ideas to get 5-6%

Post by gougou »

Home builders such as LEN, DHI, PHM all trade at less than 10x P/E. So theoretically you are getting 10%+ return owning an inflation protected growing business.

Some REITs still yield more than 5%. ALX is a conservatively financed REIT that yields 6.5% that trades about 30% below its NAV. Last year there were so many more REITs that were dirt cheap but now they are hard to find.

Pipeline companies are also pretty cheap. If you don’t mind k1s, there are EPD, ET, MMP, MPLX etc. Oil majors such as XOM also yields 6%.

And some foreign stocks are also cheap. Bank of China HK.3988 is a growing business yielding 8.5% with 3.5x P/E ratio.

I guess any of these companies could go belly up. But they probably won’t all go belly up at the same time. So if I buy all of them I should have some reasonable returns.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
BV3273
Posts: 909
Joined: Mon Oct 19, 2015 7:20 pm

Re: Ideas to get 5-6%

Post by BV3273 »

Nate79 wrote: Sun Jun 20, 2021 12:51 pm
investuntilimrich wrote: Sun Jun 20, 2021 10:40 am I saw a couple of mentions of fundrise, I put in the minimum 1k as a test about 6 months ago. So far it has $41.50 in appreciation and just over 6$ in dividends. I don't have an opinion on this product, I just plan to stay at the minimum and I'll check back on it in 5 years and see how it's done and go from there.
Yes, I've written a number of reviews of my experience with Fundrise and this would be my recommendation.
+1 on Fundrise. I like it. Returned about 5.8% for me since the end of this January. Not as much as the market but I like the diversification.
finite_difference
Posts: 3633
Joined: Thu Jul 09, 2015 7:00 pm

Re: Ideas to get 5-6%

Post by finite_difference »

On top of my Wellington and Vanguard Balanced Fund suggestion, REITs and corporate bonds might fit the bill.
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh
NabSh
Posts: 377
Joined: Fri Dec 25, 2020 11:09 am
Location: USA

Re: Ideas to get 5-6%

Post by NabSh »

You can look into Groundfloor
https://groundfloor.us/
User avatar
HomerJ
Posts: 21281
Joined: Fri Jun 06, 2008 12:50 pm

Re: Ideas to get 5-6%

Post by HomerJ »

gougou wrote: Mon Jun 21, 2021 1:12 am Home builders such as LEN, DHI, PHM all trade at less than 10x P/E. So theoretically you are getting 10%+ return owning an inflation protected growing business.

Some REITs still yield more than 5%. ALX is a conservatively financed REIT that yields 6.5% that trades about 30% below its NAV. Last year there were so many more REITs that were dirt cheap but now they are hard to find.

Pipeline companies are also pretty cheap. If you don’t mind k1s, there are EPD, ET, MMP, MPLX etc. Oil majors such as XOM also yields 6%.

And some foreign stocks are also cheap. Bank of China HK.3988 is a growing business yielding 8.5% with 3.5x P/E ratio.

I guess any of these companies could go belly up. But they probably won’t all go belly up at the same time. So if I buy all of them I should have some reasonable returns.
If you buy 10, and even one goes belly up (100% loss), you may not get 5-6% returns like the OP wants.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
grok87
Posts: 10512
Joined: Tue Feb 27, 2007 8:00 pm

Re: Ideas to get 5-6%

Post by grok87 »

skimming the thread, i see a few folks have mentioned [commercial] real estate. that would seem to fit the bill of more risk than bonds but less risk than stocks. REIT of course are stocks so would not fit the bill.

do you have access to the TIAA real estate annuity?
https://www.tiaa.org/public/pdf/eligibi ... ternal.pdf

the fees are kind of high by boglehead standards- like 0.85% i think.

but it's up like 5.5% YTD i think. That may be the bounce-back from the pandemic
according to this source, cap rates are around 6.5% these days
https://cdn.nar.realtor/sites/default/f ... 7-2021.pdf

so if you net off the 0.85% expense ratio, you might expect annual returns close to 6%.
cheers,
grok
RIP Mr. Bogle.
edudad
Posts: 66
Joined: Wed Mar 24, 2021 10:47 am

Re: Ideas to get 5-6%

Post by edudad »

Risk mitigated/controlled retail options selling and capatizing on the time and IV, can possibly get 5%-6% on average, some times, it might give negative results too, beware.

But you should know what you are doing.
User avatar
eye.surgeon
Posts: 1143
Joined: Wed Apr 05, 2017 1:19 pm
Location: California

Re: Ideas to get 5-6%

Post by eye.surgeon »

Pick a stock/bond allocation you're comfortable with, invest in low cost index funds, check it once or twice a year. You're done. There's no free lunch, your returns will be what they will be. You want to beat the market? Save more or spend less.
"I would rather be certain of a good return than hopeful of a great one" | Warren Buffett
protagonist
Posts: 9277
Joined: Sun Dec 26, 2010 11:47 am

Re: Ideas to get 5-6%

Post by protagonist »

ryanbohle wrote: Fri Jun 18, 2021 4:53 pm   Im looking to get about 5 or 6 percent return   I’m willing to put this investment at more risk than a bond. But ideally less risk that the stock market.  
Thoughts:
Any investment that MIGHT get 5-6% is going to involve a fair amount of risk these days. And if you are talking about a fair amount of risk, you can't, in the same breath, EXPECT a 5-6% return, or really any specific return. You might get a 20% annual return. Or you might lose your shirt. What goes along with risk is uncertainty.
The only investments where you can "expect" a specific return are fixed income investments, and there are very few of those, if any, that will provide you with more than 2% nominal currently (even that is questionable). What you lose in potential return you gain in certainty. But, at least now, that is losing to inflation.
So ideally you will have part of your portfolio in fixed income investments that are pretty "certain" and the rest in riskier investments that are uncertain. How much in each depends on your risk tolerance, not on expectations with no justifiable basis.
gougou
Posts: 1317
Joined: Thu Sep 28, 2017 7:42 pm

Re: Ideas to get 5-6%

Post by gougou »

HomerJ wrote: Mon Jun 21, 2021 9:19 pm
gougou wrote: Mon Jun 21, 2021 1:12 am Home builders such as LEN, DHI, PHM all trade at less than 10x P/E. So theoretically you are getting 10%+ return owning an inflation protected growing business.

Some REITs still yield more than 5%. ALX is a conservatively financed REIT that yields 6.5% that trades about 30% below its NAV. Last year there were so many more REITs that were dirt cheap but now they are hard to find.

Pipeline companies are also pretty cheap. If you don’t mind k1s, there are EPD, ET, MMP, MPLX etc. Oil majors such as XOM also yields 6%.

And some foreign stocks are also cheap. Bank of China HK.3988 is a growing business yielding 8.5% with 3.5x P/E ratio.

I guess any of these companies could go belly up. But they probably won’t all go belly up at the same time. So if I buy all of them I should have some reasonable returns.
If you buy 10, and even one goes belly up (100% loss), you may not get 5-6% returns like the OP wants.
Sure, but one could double to make it up. Also most of my picks have EPS yield a lot more than 5% to 6% so there’s some margin of error/safety.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
Scooter57
Posts: 2019
Joined: Thu Jan 24, 2013 8:20 am

Re: Ideas to get 5-6%

Post by Scooter57 »

No one has mentioned high quality REITs along the lines of W P Carey, Omega Health Investors, and Realty Income. The real estate ETF (VNQ) right now is so top heavy in some tech REITs that exploded this past year and have ridiculous prices that the yield isn't worth the risk. But some of the triple net REITs are only starting to recover after lockdown and still have high yields.

Investing properly in them takes some research but ones like the ones I mentioned have long track records. The right ones are also resistant to inflation as their leases with renters factor in adjustments for inflation. They can be treated as long term investments. But they are best placed in an IRA as their gains can be taxed at regular income rates and some (not all) return capital.

If you really want to live on the wild side there are Business Development Companies (BDCs) that have very high yields. Main Street Capital comes to mind.
BogleFan510
Posts: 1039
Joined: Tue Aug 04, 2020 2:13 pm

Re: Ideas to get 5-6%

Post by BogleFan510 »

removed by author
Last edited by BogleFan510 on Fri Jul 09, 2021 5:33 pm, edited 1 time in total.
NabSh
Posts: 377
Joined: Fri Dec 25, 2020 11:09 am
Location: USA

Re: Ideas to get 5-6%

Post by NabSh »

Is there a place to research REITs and BDCs?
Scooter57 wrote: Tue Jun 22, 2021 4:28 pm No one has mentioned high quality REITs along the lines of W P Carey, Omega Health Investors, and Realty Income. The real estate ETF (VNQ) right now is so top heavy in some tech REITs that exploded this past year and have ridiculous prices that the yield isn't worth the risk. But some of the triple net REITs are only starting to recover after lockdown and still have high yields.

Investing properly in them takes some research but ones like the ones I mentioned have long track records. The right ones are also resistant to inflation as their leases with renters factor in adjustments for inflation. They can be treated as long term investments. But they are best placed in an IRA as their gains can be taxed at regular income rates and some (not all) return capital.

If you really want to live on the wild side there are Business Development Companies (BDCs) that have very high yields. Main Street Capital comes to mind.
SuperXmas
Posts: 107
Joined: Thu Dec 31, 2020 10:53 pm

Re: Ideas to get 5-6%

Post by SuperXmas »

Private real estate might be a good option for you. Should be able to get >8% and with a much lower standard deviation.
ryanbohle wrote: Fri Jun 18, 2021 4:53 pm I am looking for ideas for an investment.   Im looking to get about 5 or 6 percent return   I’m willing to put this investment at more risk than a bond. But ideally less risk that the stock market.  Liquidity is of little concern. Does anything fitting these parameters exist out there?

(5-6 before tax or accounting for inflation. My whole desire essentially is an investment that will cover taxes, inflation and it’s own fees. But not much more.)

Thank you in advance for your thoughts and time.
grok87
Posts: 10512
Joined: Tue Feb 27, 2007 8:00 pm

Re: Ideas to get 5-6%

Post by grok87 »

Scooter57 wrote: Tue Jun 22, 2021 4:28 pm No one has mentioned high quality REITs along the lines of W P Carey, Omega Health Investors, and Realty Income. The real estate ETF (VNQ) right now is so top heavy in some tech REITs that exploded this past year and have ridiculous prices that the yield isn't worth the risk. But some of the triple net REITs are only starting to recover after lockdown and still have high yields.

Investing properly in them takes some research but ones like the ones I mentioned have long track records. The right ones are also resistant to inflation as their leases with renters factor in adjustments for inflation. They can be treated as long term investments. But they are best placed in an IRA as their gains can be taxed at regular income rates and some (not all) return capital.

If you really want to live on the wild side there are Business Development Companies (BDCs) that have very high yields. Main Street Capital comes to mind.
well REITs are stocks right? i thought OP wanted something with less risk thank Stocks.

on your point about taxation, IMHO placement in IRA is less clear. REIT distributions consist of 3 things, none of which are taxed at regular income rates if held in taxable:
https://www.millionacres.com/taxes/what ... -tax-rate/

1) regular income or QBI income: taxed at 80% of ordinary income rates
2) Long term capital gain distributions: taxed at LTCG rates
3) Return of capital: not taxed at all until you sell- then at long term capital gain rates (if held 1+year)

all 3 of these will be eventually taxed at ordinary income rates if you hold in a regular iRA

cheers,
'grok
RIP Mr. Bogle.
backpacker61
Posts: 1613
Joined: Wed May 20, 2020 6:36 am

Re: Ideas to get 5-6%

Post by backpacker61 »

NabSh wrote: Tue Jun 22, 2021 7:00 pm Is there a place to research REITs and BDCs?
Scooter57 wrote: Tue Jun 22, 2021 4:28 pm If you really want to live on the wild side there are Business Development Companies (BDCs) that have very high yields. Main Street Capital comes to mind.
I use this site for BDC's. No experience researching REIT's.

https://cefdata.com/bdc/

As a Boglehead, the expense ratios will whiten your teeth. :shock:
“Now shall I walk or shall I ride? | 'Ride,' Pleasure said; | 'Walk,' Joy replied.” | | ― W.H. Davies
Scooter57
Posts: 2019
Joined: Thu Jan 24, 2013 8:20 am

Re: Ideas to get 5-6%

Post by Scooter57 »

NabSh wrote: Tue Jun 22, 2021 7:00 pm Is there a place to research REITs and BDCs?
Seeking Alpha features Brad Thomas, a guy with decades of experience in commercial real estate who does a good job analyzing REITs. The site is now subscriber only, but you can get free access for two months if you publish an article with them. That isn't too hard to do. They publish dozens every day. Many are written by amateur investors like those here. They are always looking for coverage on ETFs.
grok87 wrote: Wed Jun 23, 2021 5:09 am on your point about taxation, IMHO placement in IRA is less clear. REIT distributions consist of 3 things, none of which are taxed at regular income rates if held in taxable:
https://www.millionacres.com/taxes/what ... -tax-rate/

1) regular income or QBI income: taxed at 80% of ordinary income rates
2) Long term capital gain distributions: taxed at LTCG rates
3) Return of capital: not taxed at all until you sell- then at long term capital gain rates (if held 1+year)

all 3 of these will be eventually taxed at ordinary income rates if you hold in a regular iRA
Everything in an IRA will be taxed at ordinary income rates eventually, but REIT income will compound in a meaningful way in an IRA with rates around 5%. This is better than what you will get from large cap-dominated index funds and most high quality dividend paying stocks. I'd love to keep some in my taxable account, but it is just too much of a complication.

The QBI deduction can be more complicated than a straightforward discount over ordinary income rates, and becomes even more complicated for high earners, and hair-tearingly obscure for high earners with Schedule C income. Ditto the taxation on return of capital. I believe you will also have to delay paying your taxes to make sure that your dividends from the REIT are properly characterized. The one time Vanguard sent me a revised 1099 weeks after I had filed my taxes it was because I held VNQ in a taxable account. So it is just a whole lot simpler to put REITs in an IRA.
EfficientInvestor
Posts: 580
Joined: Thu Nov 01, 2018 7:02 pm
Location: Alabama

Re: Ideas to get 5-6%

Post by EfficientInvestor »

There have been a few mentions of covered calls. This is how I would approach trying to get a consistent 5-6% return using covered calls:

Step 1 - Set up a base portfolio of ETFs that have good options liquidity that attempts to target a high risk-adjusted return. To do this let's assume volatility and correlation will continue to be what they have been in the past. Then, let's make an assumption on forward returns. For instance:

S&P 500 (SPY) - 6%
Long Term Treasuries (TLT) - 2%
Gold (GLD) - 2%

Plug these assumptions into PortfolioVisualizer Forecasted Efficient Frontier and get the following allocation:

57% SPY, 33% TLT, 10% GLD
This allocation has a projected return of ~4.3% and Std Dev of ~9.7%
here is the link: https://www.portfoliovisualizer.com/eff ... ints=false

Step 2 - Sell covered calls against a portion of holdings (up to you how much).

If you sell 50 delta (at the money) calls on half of each holding, you get some consistent premium while not completely capping your upside. Over time, your total position will average out to be 75 delta (the 50 delta calls against 50% of holdings reduces portfolio delta by 25). Generally speaking, this means your total portfolio std dev will be around 7.3% instead of 9.7%. If you don't care about capping all your upside, you could sell calls against the whole portfolio and bring the std dev down to just under 5%.

Here are the current premiums and premium/underlying for at the money call options 30 days out on each fund:

SPY - 5.25 per share --> 5.25/423.15 = 1.24%
TLT - 1.90 per share --> 1.90/142.86 = 1.33%
GLD - 2.50 per share --> 2.50/167.37 = 1.49%

These premiums are subject to change month to month, but let's just assume these represent the average premium we can expect.

The weighted average of these premiums is 1.29% (per month). So if you sell at the money calls against half your holdings every month, you would bring in 0.65% per month. Do that for 12 months and you bring in 7.75% for the year in call premiums. If the base portfolio is down for the year, this premium will help offset the decline. If the base portfolio is up for the year, the selling of the calls will cap your gains.

A word of caution that others might have said...managing covered calls can be difficult. Volatility of the underlying can put your option way in the money (under water) and you have to have a plan for how to manage the rolling of the calls. I personally like to gradually step my way out of my call being under water. Instead of buying a 95 delta back at a loss and reselling at 50 delta, I'll go out a month and resell at 75 delta and give it a chance to come back a little. If it continues to rise and I'm at 95 delta again, I'll just keep rolling up and out to 75 delta until it comes back.
grok87
Posts: 10512
Joined: Tue Feb 27, 2007 8:00 pm

Re: Ideas to get 5-6%

Post by grok87 »

Scooter57 wrote: Wed Jun 23, 2021 8:57 am
NabSh wrote: Tue Jun 22, 2021 7:00 pm Is there a place to research REITs and BDCs?
Seeking Alpha features Brad Thomas, a guy with decades of experience in commercial real estate who does a good job analyzing REITs. The site is now subscriber only, but you can get free access for two months if you publish an article with them. That isn't too hard to do. They publish dozens every day. Many are written by amateur investors like those here. They are always looking for coverage on ETFs.
grok87 wrote: Wed Jun 23, 2021 5:09 am on your point about taxation, IMHO placement in IRA is less clear. REIT distributions consist of 3 things, none of which are taxed at regular income rates if held in taxable:
https://www.millionacres.com/taxes/what ... -tax-rate/

1) regular income or QBI income: taxed at 80% of ordinary income rates
2) Long term capital gain distributions: taxed at LTCG rates
3) Return of capital: not taxed at all until you sell- then at long term capital gain rates (if held 1+year)

all 3 of these will be eventually taxed at ordinary income rates if you hold in a regular iRA
Everything in an IRA will be taxed at ordinary income rates eventually, but REIT income will compound in a meaningful way in an IRA with rates around 5%. This is better than what you will get from large cap-dominated index funds and most high quality dividend paying stocks. I'd love to keep some in my taxable account, but it is just too much of a complication.

The QBI deduction can be more complicated than a straightforward discount over ordinary income rates, and becomes even more complicated for high earners, and hair-tearingly obscure for high earners with Schedule C income. Ditto the taxation on return of capital. I believe you will also have to delay paying your taxes to make sure that your dividends from the REIT are properly characterized. The one time Vanguard sent me a revised 1099 weeks after I had filed my taxes it was because I held VNQ in a taxable account. So it is just a whole lot simpler to put REITs in an IRA.
Why is it complicated for high earners without schedule c income?
RIP Mr. Bogle.
Scooter57
Posts: 2019
Joined: Thu Jan 24, 2013 8:20 am

Re: Ideas to get 5-6%

Post by Scooter57 »

grok87 wrote: Wed Jun 23, 2021 12:13 pm
Scooter57 wrote: Wed Jun 23, 2021 8:57 am <snip>
The QBI deduction can be more complicated than a straightforward discount over ordinary income rates, and becomes even more complicated for high earners, and hair-tearingly obscure for high earners with Schedule C income. Ditto the taxation on return of capital. I believe you will also have to delay paying your taxes to make sure that your dividends from the REIT are properly characterized. The one time Vanguard sent me a revised 1099 weeks after I had filed my taxes it was because I held VNQ in a taxable account. So it is just a whole lot simpler to put REITs in an IRA.
Why is it complicated for high earners without schedule c income?
Looking at https://www.irs.gov/newsroom/qualified- ... -deduction it appears that it isn't, unless you also have income from qualified publicly traded partnerships (PTP) when it might be. I am not clear if PTPs include MLPs.

If someone has checked this out with an accountant and gotten the complete story I'd love to hear it.
grok87
Posts: 10512
Joined: Tue Feb 27, 2007 8:00 pm

Re: Ideas to get 5-6%

Post by grok87 »

Scooter57 wrote: Thu Jun 24, 2021 5:34 pm
grok87 wrote: Wed Jun 23, 2021 12:13 pm
Scooter57 wrote: Wed Jun 23, 2021 8:57 am <snip>
The QBI deduction can be more complicated than a straightforward discount over ordinary income rates, and becomes even more complicated for high earners, and hair-tearingly obscure for high earners with Schedule C income. Ditto the taxation on return of capital. I believe you will also have to delay paying your taxes to make sure that your dividends from the REIT are properly characterized. The one time Vanguard sent me a revised 1099 weeks after I had filed my taxes it was because I held VNQ in a taxable account. So it is just a whole lot simpler to put REITs in an IRA.
Why is it complicated for high earners without schedule c income?
Looking at https://www.irs.gov/newsroom/qualified- ... -deduction it appears that it isn't, unless you also have income from qualified publicly traded partnerships (PTP) when it might be. I am not clear if PTPs include MLPs.

If someone has checked this out with an accountant and gotten the complete story I'd love to hear it.
thanks
RIP Mr. Bogle.
Capster1
Posts: 252
Joined: Thu Jun 24, 2021 11:34 pm

Re: Ideas to get 5-6%

Post by Capster1 »

Well, I have a closed end Municipal Bond fund that pays over a 4% yield. By the time you throw in your tax rate and not paying taxes, it is the equivalent of even more.
Now, it certainly has risks (interest rates for one). Most are also leveraged, however, you can find one with barely any leverage.
However, you won't get completely obliterated in the event of a stock market crash, but you won't come away unscathed either. Looking back historically, the drawdowns have been less than stocks.
You can use CEFConnect screener to find possibilities. The problem is these are trading over NAV now and you'd want to wait until they are back under NAV.
grok87
Posts: 10512
Joined: Tue Feb 27, 2007 8:00 pm

Re: Ideas to get 5-6%

Post by grok87 »

Capster1 wrote: Fri Jun 25, 2021 12:51 am Well, I have a closed end Municipal Bond fund that pays over a 4% yield. By the time you throw in your tax rate and not paying taxes, it is the equivalent of even more.
Now, it certainly has risks (interest rates for one). Most are also leveraged, however, you can find one with barely any leverage.
However, you won't get completely obliterated in the event of a stock market crash, but you won't come away unscathed either. Looking back historically, the drawdowns have been less than stocks.
You can use CEFConnect screener to find possibilities. The problem is these are trading over NAV now and you'd want to wait until they are back under NAV.
for me these are in the camp of "don't invest in what you don't understand"
one such fund is BTT the Blackrock municipal 2030 Target Term Trust.
https://www.blackrock.com/us/individual ... vidual.pdf

The underlying bonds have a yield to worst of 2%. that seems possible for 9 year munis- bloomberg shows the 10 year muni yield at 1.02%
https://www.bloomberg.com/markets/rates ... t-bonds/us
but that is for AAA munis with 5% coupon and probably a 7-10 year call. i can see a fund getting to 2% by taking on extra credit risk, call risk, or coupon risk (i.e. buying lower coupon bonds or par bonds)

but the fund pays a 2.95% distribution yield based on leverage of 34.3% and an expense ratio of 1.56%
The fund trades close to NAV so i'll ignore the premium/discount for simplicity. the math i would think is:

fund yield = 2%/(1-34.35%) - 1.56% = 1.48%

so how do they get to 2.95%? the fact sheet does note that some of the 2.95% distribution yield may represent return of capital.
or it could be that the fund yield is based off leverage applied to "current yield" rather than yield-to-worst or yield-to-maturity. if the current yield was say 3% then the math would be:

fund yield = 3%/(1-34.35%) - 1.56% = 3.0% which would basically tie to the 2.95%

there are lots of ways to fool investors with yields. that's why the SEC instituted the SEC yield for bond funds. i've never understood why that isn't a thing for closed end bond funds. buying a bond fund or a bond based on its current yield rather than it's SEC yield or yield to maturity is a bad idea.

cheers,
grok
RIP Mr. Bogle.
User avatar
grabiner
Advisory Board
Posts: 35307
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: Ideas to get 5-6%

Post by grabiner »

EfficientInvestor wrote: Wed Jun 23, 2021 10:37 am There have been a few mentions of covered calls. This is how I would approach trying to get a consistent 5-6% return using covered calls:

Step 2 - Sell covered calls against a portion of holdings (up to you how much).

If you sell 50 delta (at the money) calls on half of each holding, you get some consistent premium while not completely capping your upside. Over time, your total position will average out to be 75 delta (the 50 delta calls against 50% of holdings reduces portfolio delta by 25).
But there is no free lunch. An investment with a 50-delta call has half the volatility of the investment, but also half the expected excess return. (The Black-Scholes model for option pricing is based on the lack of a free lunch; the return of a perfectly hedged portfolio of stocks and call options is the same as the return of a risk-free investment.)

And there is a tax cost compared to just reducing your stock risk by holding bonds. You cannot count the time you hold a covered call as part of the holding period for qualified dividends, so your stock dividends will become non-qualified. Gains and losses from expired calls, or calls you buy back, will be taxed every year. And if a call is exercised, you will be forced to sell the underlying stock for a capital gain.
Wiki David Grabiner
EfficientInvestor
Posts: 580
Joined: Thu Nov 01, 2018 7:02 pm
Location: Alabama

Re: Ideas to get 5-6%

Post by EfficientInvestor »

grabiner wrote: Sat Jun 26, 2021 10:51 pm
EfficientInvestor wrote: Wed Jun 23, 2021 10:37 am There have been a few mentions of covered calls. This is how I would approach trying to get a consistent 5-6% return using covered calls:

Step 2 - Sell covered calls against a portion of holdings (up to you how much).

If you sell 50 delta (at the money) calls on half of each holding, you get some consistent premium while not completely capping your upside. Over time, your total position will average out to be 75 delta (the 50 delta calls against 50% of holdings reduces portfolio delta by 25).
But there is no free lunch. An investment with a 50-delta call has half the volatility of the investment, but also half the expected excess return. (The Black-Scholes model for option pricing is based on the lack of a free lunch; the return of a perfectly hedged portfolio of stocks and call options is the same as the return of a risk-free investment.)

And there is a tax cost compared to just reducing your stock risk by holding bonds. You cannot count the time you hold a covered call as part of the holding period for qualified dividends, so your stock dividends will become non-qualified. Gains and losses from expired calls, or calls you buy back, will be taxed every year. And if a call is exercised, you will be forced to sell the underlying stock for a capital gain.
I don’t disagree with what you are saying. I’m not trying to say you can get more return by doing what I am proposing. I’m just saying you could try to increase your odds of getting a consistent 5% return by doing what I have proposed.
Post Reply