Picking the right shares
The backbone of the FIRE Revolution strategy is to pick the right stocks. And I’m not talking about trying to unearth the next Google. No, we are looking for the sort of boring dividend-yielding stocks an income investor would be happy to own already.
I’ll teach you how to pick candidate stocks to ensure that they are good dividend payers, have no obvious skeletons in their closet, and are trading at a price that you’d be happy to pay. If you’ve never done this before, don’t worry — I’ll show you exactly how.
Income stream #1: Selling Puts
Once we’ve zeroed in on a great dividend-paying stock, we aim to sell ‘Buy Low’ contracts — cash secured puts — to try and pick up the shares for less than they are currently trading at.
That’s the maximum we are going to pay for this stock. We’ll either get it at the price we want, or we’ll simply walk away after a set period of time. And, we’ll get paid a premium in either case.
And how would you execute this plan?
By selling a put option with a limited lifespan and a ‘strike price’ below the current price. If the share price drops below that level by the time the option expires, that’s great, you pick up the shares at the agreed price.
And, if the share price does not drop below that level by the time the option expires. No problem, you can try again or simply walk away.
And here is the best bit —you are paid a premium, regardless of the outcome.
The amount varies, but an average of 1% – 2% of the share price per month, is certainly possible.
Income stream #2: Collecting Dividends
Remember that we specialise in large boring high-yielding blue chips?
Well, they pay dividends usually every quarter or six months. That’s a great income stream in its own right. Here in the UK, we are blessed with some of the highest yielding companies in the world. It’s quite possible to pick FTSE 100 companies that pay 5%, 6% or even higher. And in our other target market — the US — there are also many great companies that pay hefty dividends as well.
And if you pick the right companies, those dividends grow over time. That’s essential to stay ahead of inflation.
Income stream #3: Selling Covered Calls
Once you own the shares, you can sell ‘Sell High’ contracts — covered calls — with the aim of offloading the shares at a higher price and earning additional income.
Selling a call option allows an investor to ‘lock in’ a sell price for a set period to ensure that the shares will be sold at that level, or not at all.
So, by selling a call option with a ‘strike price’ higher than the price they paid for the shares, they can implement the second half of the well-known ‘buy low, sell high’ adage. If the share price rises above the strike price by the time the option expires, the shares are sold at the agreed price.
And if the share price is below the strike price by the time the option expires, that’s no problem either. They can simply sell another call option. And then another. And so on.
But here is the really clever bit. Even if the shares drop in value, we can sell them for a loss but still make a decent profit on the overall campaign. Try doing that with a traditional ‘buy and hold’ approach.
And the best bit is — you get paid a premium, regardless of the outcome.
The amount varies, but an average of 1% – 2% of the share price per month, is perfectly possible.
Income stream #4: Selling The Shares
You may go many months repeatedly selling covered calls on the stocks that you own and collecting premium and dividends along the way. But eventually, the share price will rise above the strike price and your shares will be automatically sold.
It’s not always possible, but if you’ve sold the right covered call, the price the shares sell for will guarantee a profit.
That’s the fourth income stream.
Pretty good eh?