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NAVIGATING THE
AMERICAN RETIREMENT CRISIS
and Two High-Yield Stocks to Boost Income

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In so many ways life is better for us today than it was a generation or two ago. But it’s also a lot more
complicated.

Take retirement, for example. Pensions used to be fairly common. Many workers retired to an income
that was guaranteed for the rest of their lives. But now, pensions are going the way of 8-track tapes.
Social Security is really only meant to be an income supplement and who knows how long it will be
around.

The lack of retirement income wasn’t that big a deal in years past. Even just a generation ago, a worker
that retired at 65 frankly didn’t expect to live that much longer. But things have changed. Now, with
advances in medicine and healthier lifestyles, you can reasonably expect to live another 20 or 30 years
after retirement.

Longer life spans are a beautiful thing. But it also makes this income thing a much bigger problem.
Many people are going to have to figure out a way to sustain an income for several decades after they
stop working. Without a guaranteed source of income like a pension, they’ll have to figure out a way to
generate income from savings.

That won’t be easy considering today’s pathetic payouts on more traditional investments. Here are some
rates we’re looking at:

• 10-year Treasury Bond 0.64%

• iShares iBox Investment Grade Corporate Bond ETF 3.20%
• 2-year CD 0.65%
• AAA rated 20-year municipal bond 1.75%
• Money market account 0.73%
• S&P 500 dividend yield 2.09%

These rates won’t get you anywhere.

Even the best yields from this list barely even keep pace with inflation and taxes. You need a ton of
money to earn a substantial income at these rates. Most people will need a much higher percentage
return to generate a meaningful income.

Income is the key to maintaining principal. Ideally, you want your savings to spin off interest and income
that you use for expenses while leaving the principal intact, or growing it over time. Without sufficient
income, you might spend principal and quickly deplete savings. This is a problem, especially for someone
no longer working. When the principal runs out, then what?

So, at a time when it is more crucial than ever before that people generate an income from savings,
current low rates are making it nearly impossible. Even if you only need savings and investment income
to supplement other forms of income, it’s still a difficult thing to pull off in this environment.

Most people in this dilemma are not investing experts, although the environment is putting them in a
position where they really need to be. Many spend their life pursuing other endeavors and can’t spend
every day scouring the markets for income opportunities. And they may not have devoted the last several

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decades to honing their investment skills.
Investing for income is not a new idea.

But it used to be a lot simpler. There were bond portfolios that would earn 6% on tax-free municipal
bonds and 8% on investment-grade bond funds. The bonds were supplemented with high dividend-
paying stocks that added principal growth.

And it was all for investors that weren’t going to live a whole lot longer. Now, bonds pay practically
nothing and they are treacherous as interest rates have practically no place to go but higher. Most
dividend stocks have considerably lower yields than they used to. And people need a higher income for
longer.

Providing a decent income while growing principal is still a great strategy for investors who are in the
accumulation phase and/or not dependent on investment income to live. But today’s retirees, or those
close to retirement, need to take their incomes to levels well beyond what current conventional strategies
could possibly yield.

In today’s environment, investing is about turbo-charging current income for those that require much
more payout production than noninvestment professionals could deliver. It’s about creating another
source of income and about using acquired capital to generate a meaningful income stream that can
have a positive impact on your life.

Here are a few of the strategies and techniques to use with the goal of providing double-digit annual
payouts while growing principal over time.

OFF-THE-RADAR HIGH DIVIDEND STOCKS

Dividends are the most underrated things in the market today. Since 1926 dividends have accounted
for more than 40% of stock market returns. But that’s just the dividends themselves. Stocks that pay
dividends have vastly outperformed stocks that don’t.

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Between 1972 and 2019 dividend-paying stocks generated an average annual return of over 8.78% while
non-dividend payers provided just 2.4% returns. Companies with the cash flow and balance sheet to pay
dividends tend to be more solid and established companies whose stocks perform well over the long
term.

But dividend stocks don’t pay out the yields they used to. Historically, the dividend yield for the S&P 500
Index has averaged over 4%. But today that yield is a paltry 2.09%.

That said, there are certain classes of stocks that pay much higher dividends than the average. You see,
in order to incentivize certain businesses, the U.S. government has granted special tax status. Companies
with this advantage pay no taxes at the corporate level provided the bulk of earnings are paid out in the
form of dividends or distributions.

Because these securities are able to pay out money normally lost to taxes, they pay higher yields than
regular corporations.

1. Master Limited Partnerships (MLPs)

These tax-advantaged securities operate primarily in the energy sector. MLPs are involved
in oil and gas exploration, piping and storing infrastructure, and refining and marketing.
The Alerian MLP ETF (AMLP), which tracks an index of MLPs in the energy space, currently
yields 7.26%.

2. Real Estate Investment Trusts (REITs)

You can buy real estate properties and generate an income by charging rent. But that
can be an operational headache. With REITs you can enjoy the income that real estate
generates without lifting a finger. REITs are involved in every type of property including

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 commercial, retail, residential and medical. The benchmark Vanguard RET ETF (VNQ)
currently yields 4.2%.
3. Business Development Companies (BDCs)

These little-known companies make high interest loans and/or take equity stakes in
promising startup companies. They provide capital and expertise to take businesses to a
higher level and fill a need underserved by banks. These securities have juicy payouts. The
Wells Fargo Business Development Index (BDCS) currently yields 7.51%.

COVERED CALL WRITING

Investors today have opportunities that simply weren’t available in the past. The proliferation of
information and new investment vehicles has created strategies to perform well in just about any market.

A strategy particularly well suited for today’s world is covered call writing. Most investors are unaware
of the strategy and that it is one of the best and most low-risk sources of income. A good covered call
writing strategy can provide an enormous boost to your regular payouts.

A call option is essentially a right to buy a stock at a certain price at a specific date in the future. It is
generally a bet that the price of the stock will go up. Buying a call is highly speculative because it is likely
that the stock will not rise to meet the price and the option will expire worthless, and the investor will
lose 100% of his capital.

However, selling or “writing” a call when you own the underlying stock position is a very conservative,
low-risk options strategy.

Statistics show that about 83% of all options expire worthless. So consider the buyer of a call to be like a
gambler at a casino. Every once in a while, they may win, but the odds are stacked against them. When
you sell a call you are like the house. In effect, you get on the smart side of the deal.

Here’s how it works in more detail:

Let’s say you own 1000 shares of a $40 stock. You write (or sell) 10 calls (each call represents 100 shares)
at a strike price of $44 expiring 3 months from now for $3 each or $3,000. The stock price must rise
above $44 for the option to be in-the-money, otherwise it expires worthless. But either way, you collect
the $3 premium.

If you write the call option under the above scenario one of three things will happen.

1. The stock trades flat, anywhere below $44

In this case the options you sold will expire worthless and you will simply keep the $3,000
premium, supplementing your income. Let’s say the stock price remains at $40. You collect
a $3 premium and enhance your percentage income on the stock by 7.5% (the $3 call
premium dividend by $40 share price) in just three months.

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 2. The stock price falls
Here, the options also expire worthless and you pocket the $3,000 premium. While you still
own a stock that has gone down, you still outperform the buy-and-hold investors who just
owned the stock by the $3,000 premium.

3. The stock rises above $44

Under this scenario, you must sell the stock (as it is “called away”) and your upside is
capped at $44 plus the $3,000 premium collected. While you lose the underlying stock, you
do get an impressive income in a short amount of time.

Let’s say the stock price rises to $45. Your total return would be the $4 appreciation in the stock price
($44 minus $40) plus the $3 call premium. The total of $7 per share would be a 17.5% return ($4 plus $3
dividend by $40) in just three months, plus any dividend received during that time.
Covered call writing works best with a stock that you would be happy to continue owning over the longer
term. However, in the short term you believe the stock will trade flat to down, or you are happy to sell it
at the higher price.

You can generate income from the stock by selling calls against your position. If the stock does rise
above the strike price, you sell the stock. So, you should be willing to sacrifice some capital appreciation
potential for extra income in the short term.

Premiums are often 4%, 5% or even 6% of the stock value and can be written on the same security
several times a year.

DIVIDEND CAPTURE
Securities typically pay dividends four times per year, every quarter. Sometimes stocks pay special
dividends over and above the regular payout. The thing is that you don’t have to own the stock for a long
time to get the dividend. You just have to own it on the record date.
The record date is the date, usually several days before the dividend is actually paid, on which the owner
of a security is locked in to receive the next dividend. You can actually own securities for just one day and
receive the quarterly income. Of course, the stock price often declines by the amount of the dividend, all
else being equal, so such trades must be well chosen.

2 PROMISING STOCKS TO CONSIDER

Even in this current market environment, we have some of the best high-yield opportunities in a decade
out there.

Altria (MO)

Altria is a cigarette company, which was part of Philip Morris until its spin-off in 2008, and just sells
domestically. They have other business, but mostly it’s about Marlboro. It’s by far the most dominant
brand of cigarettes, with better than 40% market share in the country.

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The yield on the company is 8.5%. But when you see a yield like that, the first thing you need to say is, is it
safe? Is that real?

Here’s why we believe it is.

Cigarette smoking is declining because it’s obviously bad for you. And it’s been declining at about 4% per
year for the last several decades. Altria has been able to make up the difference by raising the price of its
flagship brand and buying back shares.

Lately, however, the volume slippage increased from about 4% to about 4% to 6% per year. The main
culprit: e-cigarettes.

Since late 2018 Juul has been under attack from the regulators, primarily for marketing to young smokers
and underage smokers. But here’s the thing: If e-cigarettes have a problem and they’re sued out of
business, or into much less prominence, people will smoke more. If not, Altria owns the most dominant
brand.

So it’s got them coming and going. And despite all the crazy headlines, the company continues to grow
earnings. It also has a 50-year track record of raising the dividend every single year. If you include its
tenure as part of Philip Morris, it also has more than enough free cash flow to pay the dividend.

And there’s really no reason why they would have to cut – or choose to cut – that dividend.
The stock price is depressed because they’re overestimating this disaster from Juul, which they’ve already
mostly written off. So it’s a good cheap stock with a yield that’s very safe.

Enterprise Product Partners (EPD)

This is a massive energy infrastructure company. The United States is currently undergoing an energy
boom. The country went from being a marginal producer late last decade, in 2007 and 2008, to being the

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world’s number one producer of oil and gas. But of course, the energy industry is taking it on the chin
with the coronavirus shutdown as demand for gasoline and fuel lessens as the economy weakens.

But that will not last.

It’s very important to realize Enterprise is not susceptible to commodity prices and not dependent on the
price of oil and gas. They really make money just by oil and gas going through its system. They pipe it and
store it and process it.

And as soon as the economy gains steam again, the oil and gas will flow more. So it’s got a resilient, fee-
based based business. With a 9.1% yield it’s rock solid.

First of all, the company since its IPO in 1998 has raised the dividend every year, including in bad times
like the financial crisis and the oil price crash between 2014 and 2016. It has one of the lowest payout
ratios in the industry, 60% of earnings. And the primary reason for that is so they could retain that money
to invest in growth projects and not have to borrow money.

But they’ve since temporarily suspended those growth projects due to the pandemic. So they will earn
more than enough to cover the dividend without investing in them. It’s highly unlikely that the income is
going to fall, even in the worst quarter, to as much as 60% of what it was.

Even if that happens, the company has $6.4 billion in cash from which to pay $4 billion in annual
dividends to keep the track record going. So you have a stock that is temporarily depressed, paying a
massive yield that’s safe.

With the right strategy and the right investments, your retirement can be richer, less stressful, and more
fun.

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About Cabot

Cabot Wealth Network, established in 1970, is a trusted independent source of advice for individuals
striving to take control of their investments and find the best stocks. Its 20 investment advisory services
and annual Wealth Summit event deliver high-quality advice to more than 200,000 individual investors
and investment professionals in 141 countries. Headquartered in historic Salem, Mass., in a converted
1934 public library Cabot Wealth employees take great pride in providing intelligent investment
advice and timely, personal service without the hype and fabricated claims. Cabot is a member of the
American Association of Individual Investors, Better Business Bureau, Specialized Information Publishers
Association, and the Salem Chamber of Commerce.

Sponsored by: Cabot Wealth Network