Years ago, I had a talk with my kids about how much things cost. They looked at me in shock and horror.
“Life is expensive,” I told them.
That’s even more true today. You’re likely paying at least $4 a gallon for gas. Try getting a sandwich in a major metropolitan area for under $12 or an entrée at a restaurant for less than $20.
And housing?
Since 2017, housing prices have increased 81%. The average home in the U.S. costs $486,000, an all-time high. Rents have climbed 54%.
Meanwhile, wages have only grown 43%.
It’s especially tough if you’re retired.
Everyone is talking about inflation, but I see it as more of an income crisis.
Folks just aren’t generating enough income to keep up with rising prices.
As The Oxford Club’s Chief Income Strategist, my focus is to help people put more money in their pocket today.
Here are a few ways to boost your income.
1. Dividend Stocks
My hands-down favorite way to generate income is investing in dividend growth stocks.
I’ve spent decades investing in and writing about dividends, including in my book Get Rich with Dividends, which has sold more than 100,000 copies, has been an Amazon Best Seller, and was named Book of the Year by the Institute for Financial Literacy.
If you own “Perpetual Dividend Raisers,” which are stocks that boost their dividends every year, your income will steadily grow – hopefully at a pace that matches (or, preferably, beats) inflation.
This is what enables you to maintain or increase your buying power.
That’s what this is all about.
Yes, we all would like more money, but this strategy helps ensure you can – at the very least – maintain your current lifestyle and not slip underwater because of rising prices.
It’s a simple and inexpensive strategy that is more conservative and reliable than chasing the next AI or space stock.
2. The Best Non-Investment-Grade Bonds
Most brokers are reluctant to sell you any bonds that are not investment-grade. (“Investment-grade” means the bond is rated BBB- or higher by S&P or Baa3 by Moody’s.)
That’s because if you buy a riskier bond and the company defaults, the broker may have some explaining to do as to why they put you in a more speculative bond.
However, you can get a higher rate of interest on your corporate bonds by owning the highest-rated non-investment-grade bonds.
For example, the highest-yielding investment-grade bond I could find that matures within two years is the Boston Medical Center (CUSIP 10103dab2) July 1, 2028, 3.912% coupon bond, which has a yield to maturity of 4.9%. The bond is rated BBB-, the lowest investment-grade rating.
If you’re willing to drop one notch below investment-grade, you can get a BB+ rated PG&E (CUSIP 69331cah1) July 1, 2028, 5% coupon bond that yields 5.24%. In other words, you’ll earn a quarter of a point more with an imperceptible increase in risk.
To stay conservative, I’d avoid bonds rated lower than BB unless you’re willing to accept additional risk in exchange for higher yield.
An important note: I recommend buying individual bonds and avoiding bond funds.
If interest rates rise as I expect, a bond fund will almost surely lose money. Bond prices fall when rates rise. A bond fund is only worth whatever its net asset value (NAV) is, and the NAV will decline as rates go higher.
Individual bonds may see their prices go lower as well, but that doesn’t matter. You buy a bond to hold it until maturity, at which time you receive $1,000 per bond. It doesn’t matter if it drops to $980 in the interim. You get $1,000 at maturity. You can’t say that with a bond fund or ETF.
3. Options
Most options expire worthless, and as a result, speculators often lose money.
That’s why Wall Street sells the options rather than speculating with them.
The big institutions print money with various options-selling strategies.
But here’s the thing: It’s easy for individuals to do the same thing and generate income.
The most conservative strategy is selling a covered call.
To do this, you sell a call on a stock that you own. That gives the buyer of the call (a speculator) the right to buy your stock from you at the strike price at any time before the option expires. That’s why you sell a call whose strike price is higher than where the stock is currently trading.
If the stock rises, it could be called away, but you’ll make a profit and keep the money you received for selling the call.
If the stock declines, the money you received can help offset some of the loss.
For example, say you buy 100 shares of a stock that’s at $50 and sell a call with a strike price of $55 that expires in three months for $3.
Option contracts represent 100 shares, so if you collect $3 for selling the call, you actually receive $300. That money hits your account immediately.
If the stock rises above $55, it could be called away from you. You’d make $5 per share, or $500, in profit and keep the $3 ($300) for a total profit of $800.
On the other hand, if the stock drops to $45, the call expires worthless. You still own the stock and are down $5 on paper, but you’ve kept the $3, so you’re only down $2 ($200). You’ve reduced your paper loss.
At that point, you could liquidate the position or sell another call and collect more money.
Another strategy is selling a naked put on a stock you want to own.
The buyer of the put is betting on the stock to go down.
You are taking that bet, because you are willing to own the stock at the lower price.
Let’s say the stock is trading at $50. You think that’s a little too high, but you’d be happy to own it at $45. You sell a put with a $45 strike for $3.
If the stock never reaches $45, you keep the $3 ($300), and you could decide to sell another put and collect more income.
If the stock falls to $45, you could be “put” the stock, which means you’d have to buy 100 shares at $45 per share. But remember, you’ve already collected $3, so it’s like owning it at $42.
Now, if the stock drops to $40 at expiration, you will have to buy it at $45 (which you were always willing to do). The $3 you received upfront helps offset some of the paper loss, so you’re only down $2.
Both of these options strategies are attractive because they deposit money in your account as soon as you hit the button on your broker’s website or app.
With rates rising, inflation grinding higher, and the cost of everything never seeming to let up, people have to get creative with ways to generate more income, or else they’ll be left behind.
These simple and conservative strategies can help you earn more income and fill the gap caused by rising costs.
