30% yield on large cap stock portfolio
- 1. A strategy for yield in a volatile low interest rate environment Rick Norris, Senior Portfolio Manager Bluestone Capital Advisors 10/5/2015
- 2. High yield with moderate risk does not exist easily – US Treasuries & CDs • Pay essentially nothing – REITS • You are overexposed to this sector – High Yield Bonds • Not compensated for the risk as a worldwide recession looms and eminent FED rate hikes – Large Cap High Dividend US Equities • Not compensated for the risk in equities due to recent and expected volatility. 210/5/2015 www.bluestonecapitaladvisors.com
- 3. High Yield / Moderate Risk Strategy – Purchase a diversified portfolio of Mega Cap US Stocks based on Fundamental Analysis, Technical Analysis and Option Prices/liquidity – For each stock: • Sell Call 5% above the current stock price 45 days out • Sell Put 10% below the current stock price 45 days out – Rebalance and adjust as the situation dictates 310/5/2015 www.bluestonecapitaladvisors.com
- 4. Summary of “Vanilla” Strategy – Purchase all 30 DOW stocks and execute strategy – Results in 12.6% annual portfolio yield • 4.9% sell Call 5% above current stock price • 5.2% sell Put 10% below current stock price – Has 90% chance every 45 days of expiring worthless – Has 10% chance of loosing money every 45 days • 2.5% dividend yield – Higher yield realized if the strategy is actively managed 410/5/2015 www.bluestonecapitaladvisors.com
- 5. Refining the Strategy – Use a portfolio of 5 “cherry-picked” stocks – To increase diversification more stocks can be added Stock Dividend Yield 2016 PE multiple Implied Volatility Vol Rank Past Year Apple 1.9% 8 (ex-cash) 40% 49 out of 100 Amgen 2.3% 9.6 (ex-cash) 40% 65 out of 100 Exxon 3.9% 18 28% 49 out of 100 Wells Fargo 2.9% 11 32% 56 out of 100 General Electric 3.7% 16 28% 49 out of 100 510/5/2015 www.bluestonecapitaladvisors.com
- 6. Refined Strategy Result Summary – 30.7% annual yield if the stocks stay flat for the year vs 12.6% on the DOW – For the stocks selected, volatility is roughly 50 on a scale of 1 to 100. As volatility increases the yield increases and vice-versa – There is an infinite combination of stocks, option prices and expirations. Stock Dividend Yield Selling Puts Annual Yield Selling Calls Annual Yield Total Return Stock Flat For One Year Apple 1.9% 17.8% 24.2% 43.9% Amgen 2.3% 16.8% 19.6% 38.7% Exxon 3.9% 7.1% 16.7% 27.7% Wells Fargo 2.9% 6.1% 15.8% 24.8% GE 3.7% 7.5% 7.0% 18.2% Average Annual Return 30.7% 610/5/2015 www.bluestonecapitaladvisors.com
- 7. Strategy Monitoring, Adjusting & Rebalancing – Continually rebalance to increase return/income: • As the underlying stock moves up or down – Stock moves up a lot - Roll Up the Puts for more income – Stock moved down a lot - Roll Down the Calls for more income • As implied volatility changes • As an option comes close to expiration • As significant events occur (earnings, dividends) • As the situation dictates remove & add stocks to the portfolio 710/5/2015 www.bluestonecapitaladvisors.com
- 8. What if a Black Swan event? – These mega cap stocks are very liquid – A well diversified portfolio of high quality mega cap, high-dividend, low P/E stocks will hold up well compared to all other equities – You keep the money from sold Calls – With a diversified long and short portfolio, gains in other positions (short S&P 500) will offset this position – Flexibility to change any/all strategies used 810/5/2015 www.bluestonecapitaladvisors.com
- 9. Why isn’t everyone doing this? Requirements to execute this strategy: – Millions in capital – Knowing when to/when not to use this strategy – Stock options expertise – Huge time commitment to analyze, execute, monitor and rebalance the portfolio – Must use a discount broker (E-trade, TD, etc) due to trading commissions 910/5/2015 www.bluestonecapitaladvisors.com