Double Your Yield and Triple Your Income
Regular readers know that I am a fan of squeezing as much income as you can from your equity holdings. It’s not simply that you earn more money with higher yields on your holdings. You can make more than you might expect.
Collecting dividends, selling calls on your shares, and even loaning your shares to those who wish to short them are three income streams you can derive from owning stocks. (If you want to know more about loaning your shares, see my article How to Get New Income Streams From Your Stocks).
You see, the impact of higher portfolio yields on your income is disproportionate over the long haul. Let’s consider two examples.
This first graphic shows the impact of investing $10,000 a year, about $200 a week, over the course of 20 years.
If you invest in a super conservative fashion and achieve mere 4% annual returns, your balance after 20 years in this example is just over $300,000. If you double the yield to 8%, then your balance is just over $500,000. You have a 60% greater balance at the end of 20 years by doubling your yield.
But those figures include the $200,000 you would have invested over the course of those 20 years. When you look at just the earnings on your investment, the disproportionate impact of those higher returns becomes more apparent.
In this case, your $200,000 investment over 20 years earned just over $100,000 at 4% annual returns. But bump that up to 8%, and the returns jump to nearly $300,000. So you earn nearly three times as much for doubling your annual returns.
Why is this? It is because of annual compounding. At the end of the first year, you did in fact earn exactly double the return at 8% versus 4%. But then those incremental earnings went on in subsequent years and earned another 8% each year.
This annual compounding means that any incremental yield you can squeeze from your portfolio will have a disproportionate impact on your earnings. And the long this goes on, the more disproportionate the impact of higher yields.
This is why I am such a strong advocate of selling covered calls to boost your income. Annual yields of 8% are more achievable, and at less risk than the overall market, using a covered call strategy. You may want to consider adding this tool to your investing arsenal.
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