Contents

Understanding the Strategy

 

Pick #1: Amkor Technology, Inc.

Trade Parameters

Covered Call Strategy

Pick #2: Wabash National Corporation

Trade Parameters

Pick #3: General Motors Company

Trade Parameters

Pick #4: Gap, Inc.

Trade Parameters

Pick #5: Commercial Metals Company

Trade Parameters

Understanding the Strategy

I was still in high school when I learned about the magic of compounding. I will forever be grateful to my 9th-grade algebra teacher for digressing into that lesson on that day. Over forty years later, the lesson is still seared into my brain, because in that moment, I knew that someday I would be rich.

The keys to wealth, as I often preach, are time, patience, and compounding. Oh, there are a few other important things to keep in mind, but those are the core principles. But a small difference in the rate of return you receive over time can make an enormous difference in the wealth you build over time.

Consider a savings rate of $100 a month over 40 years. If you manage to invest that money at a return of 5%, you will accumulate $148,956 on your total contribution of $48,000.

But double that return to 10% – which is the long-term return of the S&P 500 Index – and what do you think happens? Double your money? No, in that case, you end up with $559,560 – nearly quadruple your money. The reason is the compounding of your returns.

This means it is important to squeeze every bit of return possible from your investments, another lesson I learned early on. At the same time, you want to limit the risks you take. While it is often true that higher risks lead to higher rewards, higher risks can also decimate your portfolio for many years.

Thus, over the years I developed a system that delivered superior returns at a manageable risk. The key to this system is income stocks.

Please indulge me with a brief digression into some facts. Several studies suggest dividend-paying stocks tend to outperform non-dividend-paying stocks.

A study by Hartford Funds found that dividends have played a significant role in the returns investors have received during the last several decades. Going back to 1960, 85% of the cumulative total return of the S&P 500 Index can be attributed to reinvested dividends and the power of compounding.

Another study found that dividend-paying stocks usually suffer significantly less decline in value than non-dividend-paying stocks during bear market periods.

A research paper titled “Which one is better: investing in high dividend or low dividend stocks?” found that portfolios composed of high dividend stocks are capable of better performance than medium and low dividend stocks over a period of twenty-six years.

Another article found that dividend stocks have outperformed non-dividend-payers while also delivering higher risk-adjusted returns.

Stocks with superior returns at a lower risk profile sound like a winning combination for long-term investors interested in wealth-building. This is why income stocks have long been at the heart of my investment advice.

I have shared investment advice with friends and families since I was a teenager. As I gained more experience, I gained a wider audience with which to share that advice. The fact is, I love helping people make money.

The different publications I write are all based on income stocks, but they all have different objectives. Yet they still don’t cover the entire universe of income stocks.

Utility Forecaster (UF) is devoted to income stocks in a handful of sectors. The intent there is to keep the overall portfolio volatility below that of the S&P 500. Thus, I am taking a basket of stocks that already tend to be low volatility and applying an additional volatility measure to manage the downside risk as much as possible.

Income Forecaster (IF) covers all sectors, but stocks must yield at least 7.5% while meeting certain other financial metrics. There is additional risk with high-yield stocks, as high yields can often be a sign of impending trouble. Thus, while we have managed to build a portfolio of high-yielding stocks, the volatility of this portfolio can be quite high.

Rapier’s Income Accelerator (RIA) utilizes two of my favorite techniques for generating superior returns: Covered calls and cash-covered puts. Remember, every percent you can add to your returns will have a disproportionate impact on your long-term wealth building. Again, there are multiple studies showing that these option strategies outperform long-term buy-and-hold strategies – one of the only strategies that has been shown to do so.

But there is an entire class of stocks that falls outside the parameters of all these publications. For example, a technology stock that yields 5%, trades at $7.00 a share and has a beta (a measure of volatility) of 1.50 would not meet the parameters of any of these publications. It doesn’t meet the sector or volatility requirements of UF, it doesn’t meet the yield requirement of IF, and it doesn’t meet the share price or volatility requirements of RIA.

Every month, there are stocks that I would like to recommend, but don’t because they fail one of the parameters of the publication. Note that those parameters are designed to limit volatility, but if we loosen those requirements somewhat, we can open a new world of potential income picks, which we call “Unlimited Income Picks.” Although I generally tend to limit volatility, the upside of volatility is that it provides much greater income potential, as I will show below.

One of the downsides of quality dividend-paying stocks is that yields are sometimes low. Indeed, a couple of the picks below yield only 1% or so. Although these are undoubtedly more sustainable yields than picks yielding 10%, for example, it can be hard to get excited about yields this low.

But there are two things to keep in mind. First, remember that dividend-paying stocks outperform those that don’t pay dividends. So, the yield may be low, but the capital appreciation potential is higher.

The other item is more important. I pair nearly all my stocks with call options. In this way, I can almost always boost the “effective yield” – which simply refers to the total income you earn from the stock in a year – to 8% or more. I will provide an example of this strategy below, following the first pick, that boosts the yield from 1% to over 18%.

I won’t do a full primer on the covered call strategy here. Please refer to RIA, where this strategy is discussed in detail. Nor will I provide examples for every stock pick below because option premiums can change daily. The important thing is to get the stock picks, and if you understand the strategy, you can easily pair your shares with an income-boosting call option.

The following picks may have fit the parameters for one of the other publications at some point, but presently they do not – generally because they have demonstrated more recent volatility. Without further ado, below are the Top 5 Unlimited Income Picks as of 5/10/2024. These are typically excellent candidates for a covered call or cash-covered put strategy, but I will not make specific recommendations on those trades.

Pick #1: Amkor Technology, Inc.

Amkor was last month’s #1 trade and has returned 26% since last month. You may wish to take profits here, as it is becoming close to fully valued, but it does still check all the boxes.

Amkor Technology, Inc. offers semiconductor packaging and test services globally, including turnkey packaging, system-level testing, and drop shipment services. Their product range includes flip chip scale packages, memory products, leadframe packages, and micro-electro-mechanical systems packages. Founded in 1968 and headquartered in Tempe, Arizona, the company serves various clients, including integrated device manufacturers and original equipment manufacturers.

Trade Parameters

Security	Amkor Technology, Inc.
Symbol	AMKR
Price	$42.40
Yield (%)	0.8
3-Yr Beta	2.0
Security Type	Common Stock
Sector	Information Technology
ESS Score	Bullish
FactSet Rating	Strong Buy
S&P GMI Valuation	Very Undervalued
Buy Limit	$50.00

Covered Call Strategy

Amkor pays an annual dividend of $0.32, for a paltry dividend yield of 0.8%. It’s hard to get excited about that, but we can fix it. If we want to earn 8% on Amkor, we need to boost the annual dividend to $3.39.

We can do much better than that. If I look at the option chain for Amkor – which you can easily find from your broker, at present the December 20, 2024 call option for Amkor with a strike price of $48.00 has a current premium of $3.50. If you own Amkor shares this would boost the effective yield of your shares from 1% to 19.2%. That’s quite a yield boost!

If you don’t own Amkor shares, you would open your position by buying 100 shares and by simultaneously selling that December call for $3.50. This would reduce your entry price to $38.90 per share. If shares are at or above $48.00 at expiration, you will lose your shares at that price. However, the annualized return on that trade would be 53.4%. If shares are below $48.00, then you can sell another call against your shares, maintaining your yield well into the double digits.

Note that these return parameters are better than those typically found in RIA. That’s because the stocks discussed here – like Amkor – have greater volatility. The upside is that it also means the option premiums are more attractive. You can apply this same strategy to each of the remaining picks to greatly boost the annual income on your shares.

Pick #2: Wabash National Corporation

Wabash National Corporation specializes in connected solutions for transportation, logistics, and distribution industries, primarily operating in the United States. Its Transportation Solutions segment designs and manufactures various transportation-related equipment, including dry and refrigerated van trailers, truck bodies, and refrigerated truck bodies. The Parts & Services segment offers aftermarket parts and services, truck body repair parts, and develops a digital marketplace for the transportation industry. Founded in 1985 and headquartered in Lafayette, Indiana, Wabash National serves a wide range of customers in the transportation sector.

Trade Parameters

Security	Wabash National Corporation
Symbol	WNC
Price	$20.68
Yield (%)	1.5
3-Yr Beta	1.5
Security Type	Common Stock
Sector	Industrials
ESS Score	Bullish
FactSet Rating	Buy
S&P GMI Valuation	Very Undervalued
Buy Limit	$27.00

Pick #3: General Motors Company

General Motors Company is a global automotive company specializing in designing, building, and selling trucks, cars, and automobile parts, along with software-enabled services and subscriptions. Its operations include GM North America, GM International, Cruise, and GM Financial segments, marketing vehicles under various brand names like Buick, Cadillac, Chevrolet, and GMC. Established in 1908 and headquartered in Detroit, Michigan, GM also offers automotive financing and after-sale services through its extensive dealer network.

Trade Parameters

Security	General Motors Company
Symbol	GM
Price	$46.67
Yield (%)	1.0
3-Yr Beta	1.5
Security Type	Common Stock
Sector	Consumer Discretionary
ESS Score	Bullish
FactSet Rating	Strong Buy
S&P GMI Valuation	Undervalued
Buy Limit	$56.00

Pick #4: Gap, Inc.

The Gap, Inc. is an apparel retail company founded in 1969, and headquartered in San Francisco. It sells clothing, accessories, and personal care products for men, women, and children under the Old Navy, Gap, Banana Republic, and Athleta brands. The company’s offerings include everyday apparel and fitness wear, available through company-operated and franchise stores, as well as online. It operates globally with a significant presence in Asia, Europe, Latin America, the Middle East, and Africa.

Trade Parameters

Security	Gap, Inc.
Symbol	GPS
Price	$23.07
Yield (%)	2.6
3-Yr Beta	2.6
Security Type	Common Stock
Sector	Consumer Discretionary
ESS Score	Bullish
FactSet Rating	Buy
S&P GMI Valuation	Very Undervalued
Buy Limit	$30.00

Pick #5: Commercial Metals Company

Commercial Metals Company is a steel and metal products manufacturer, recycler, and fabricator operating across the United States, Poland, China, and globally. Its North America and Europe segments process and sell ferrous and nonferrous scrap metals, along with manufacturing finished long steel products and semi-finished billets. Additionally, the company offers fabricated rebar for concrete reinforcement in various construction projects, sells construction-related products and equipment, and manufactures strength bars for the truck trailer industry and armor plates for military vehicles. Established in 1915 and headquartered in Irving, Texas, Commercial Metals Company serves a wide range of industries and customers worldwide.

Trade Parameters

Security	Commercial Metals Company
Symbol	CMC
Price	$52.39
Yield (%)	1.4
3-Yr Beta	1.5
Security Type	Common Stock
Sector	Materials
ESS Score	Bullish
FactSet Rating	Buy
S&P GMI Valuation	Undervalued
Buy Limit	$66.00