How can you protect your investments from inflation? 'Dividend growth — that’s the secret. That is the true hedge against inflation,' said one chief investment officer.
There is always uncertainty in the stock market, but the deflationary cycle that helped feed tremendous gains over the past several decades has ended. Two related strategies can give you downside protection while still capturing most of the upside potential of stocks.
Selecting stocks for rising dividend income Simpson emphasized that his main strategy is selecting blue-chip companies that he and his colleagues expect to continue raising dividends rapidly. The companies are screened for quality — management track record, earnings and cash flow growth and returns on equity.
The S&P 500 soared during the bull market and DIVO’s return was in the middle of the three, with less volatility. Simpson said the ETF is designed to capture 80% to 90% of the upside in a bull market, while only capturing 65% to 75% of a market downturn. A covered call option is one that you write when you already own a security. The strategy is used by stock investors to increase income and provide some downside protection. — Kevin Simpson, founder and chief investment officer of Capital Wealth Planning. Here’s a current example of a covered call option in the DIVO portfolio that Simpson described:
This is what Simpson meant when he said that he uses covered call options to “harvest volatility.” The volatility in the market is necessary to get an attractive yield when writing the option. He said he will only consider writing a call option if he can get an annualized yield of at least 2% to 3%.
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