How to Get New Income Streams From Your Stocks
I like to make my money work as hard for me as I can. I am not just satisfied to buy a stock and wait for it to grow. I want to own a stock that pays me dividends.
On top of that, I want to sell covered calls on that stock to generate additional income. It’s like getting extra dividends, but some caveats apply. (I won’t review the covered-call strategy here, but if you are interested in learning more see my June article, How to Make Money With Covered Calls).
Thus on the stocks I hold, I can enjoy capital appreciation, dividends, and additional income from the calls I sell. But I still haven’t exhausted the income streams from stock ownership.
Many brokers offer an additional income stream from Fully Paid Lending Programs.
The Art of the Short
First, let me digress briefly into shorting stocks. Selling a stock short means that you have borrowed shares, collected money for selling them, and then hopefully buying them back after the share price falls. It is a bet that a stock will decline. For example, sell short 100 shares at $10 for $1,000, and buy back 100 shares for $500 if they fall to $5.
I don’t like short-selling mainly because your potential loss is unlimited. If I buy a stock for $10 a share, I know my loss is limited to $10 a share. If I short a stock at $10 a share, and shares subsequently rise to $100, then I lost far more than my initial short. Hence, I don’t recommend this for most people. There are ways to manage the risk, but I just don’t like the potential risks (nor do I really want to bet against a company’s success).
But lots of people short stocks. Where do the shares come from that they borrow? From other investors.
Fully Paid Lending Programs
I am signed up for Fidelity’s Fully Paid Lending Program. Here is how it works.
I allow my holdings that are in demand by short sellers to be borrowed from my account, and I am paid an interest rate for that. This interest rate can range from a few percentage points to more than 20% annually. In return for loaning my shares, I receive collateral held at a custodial bank. So, there’s no financial risk of my shares not being paid back. I maintain full economic ownership of the securities on loan and may sell the securities or recall the loan at any time.
The following graphic from Fidelity illustrates the potential additional income stream.
There are eligibility requirements that vary from broker to broker, and some caveats do apply. You relinquish voting rights on shares that have been loaned, but you can recall them at any time to vote your shares. Your broker may also recall shares or adjust the interest rate, based purely on demand for the shares.
If the stocks you hold pay dividends, you will receive “cash-in-lieu” of dividends payments, but they could have a different tax treatment than the actual dividend from the issuer.
Maximize Your Income Streams
I invest mostly in more conservative income stocks, and Fully Paid Lending Programs particularly favor more volatile growth stocks. Of the approximately 20 positions in my brokerage account, only two are currently loaned out. But those are two positions that now give me three sources of income — dividends, call premiums, and now interest payments — in addition to capital appreciation.
There’s no guarantee that the securities from your portfolio will get picked. It all comes down to the demand for the shares. You should also keep in mind that those borrowing the shares are betting the share price will fall, something you don’t want to see. If there is tremendously high interest for the shares, then a lot of investors are betting on a share price decline. That’s another factor to consider.
But it can be a nice source of passive income for your shares. Ask your broker if they offer this program. Most major brokerages do. Then you can determine your eligibility, fill out the forms, and start earning a new income stream.
Editor’s Note: As Robert Rapier just explained, there are proven ways to boost your income. But maybe you want to “turbocharge” income. That’s where our colleague Jim Fink comes in.
As chief investment strategist of our premium publication Velocity Trader, Jim Fink doesn’t trade stocks. He trades velocity. Jim has developed proprietary stock “filters” that provide advanced knowledge of when an equity’s price is about to rapidly accelerate. Based on this knowledge, Jim constructs trades that have consistently reaped windfalls for his followers.
Want to learn about Jim’s next trades? Click here now.