Engineered Income: Who, What, Why & How - Building Alpha

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Engineered Income: Who, What, Why & How - Building Alpha


Dividend investing, REITs, oil & gas, covered calls


Income investors need to avoid chasing higher dividend yields that come with greater risk.

You can improve your life style by using Engineered Income to increase income & yield while reducing (but never eliminating) market risk.

Dividend Capture and Covered Option Boosting are two simple Engineered Income techniques that can build alpha using an arbitrage over a short investment time frame.

This idea was discussed in more depth with members of my private investing community, Engineered Income Investing.


E.I. - Who Can Use It

If you are dependent on your investment portfolio for part or all of your income to finance your living expenses, life style choices, or simply want and/or need a regular and dependable income generation from a portion of your portfolio, then Engineered Income may be just what you are looking for.

You should keep in mind that you will do a lot of trading when you employ an Engineered Income strategy. You will generally have 2 trades per month per ticker you target. These include the position entry (usually a buy-write order) and closing the position (usually a call-away or sell of the shares held after ex-div date). You will be able to do this 12 to 24 times per year. If you target just 5 tickers per cycle, that is going to be 120 to 240 trades per year. Clearly, you need to use a discount broker and you need to be trading in blocks sufficiently large so as to make transaction costs nominal. I generally target trades of at least $10,000 each, and preferably greater than $20,000 so as to achieve the goal of marginalizing the impact of trade costs. At first, these may sound like large numbers to some of you. Keep in mind that we are "recycling" our cash once or twice every month, so it is not new cash we need each month. If you have at least $50,000 total to invest in Engineered Income, then it may make sense for you.


E.I. - What It Is

Engineered Income is the term I have created to describe a structured approach to value investing in high quality income equities so as to boost the yield rate and cash income from your investment portfolio in a predictable and reliable way. The cash income and yield rate are locked in at the start of the investment, not based on hope, projections, future expectations, or the need for predicted events to take place.

E.I. - Why To Use It

Engineered Income uses your portfolio investments to generate income every month, often twice a month. It insures that the dividends you seek are not cut or eliminated while you are waiting to receive them and it provides a bonus boost on top of the dividend via the covered call option premiumsusing a strike price with a built-in intrinsic gain greater than the dividend itself. In this manner, you receive the option premium the instant you enter the transaction. Unlike most investments that require you to wait until you cash out of the investment to receive your gain, premiums are paid to you at the very moment you begin the investment.

In addition to the instant premium income, you will harvest the dividend within 15 days. This is built into the way we structure and time Engineered Income. You do not wait up to 3 months or longer until you get paid the dividend, even though it is the same amount as the company pays to those that have held for the full 3 months between dividends (or other dividend pay-cycle period). You also avoid the risk of a dividend cut or elimination during your holding period since you only target the announced dividend that has been declared by the company, not future "intended" or "planned" dividends.

The structured short hold period for dividend means that you are free to harvest it and move on with your assets to target the next ticker and dividend every 10 to 20 days, thus allowing you to use your same portfolio assets to harvest 12 to 24 quarterly dividends per year instead of just 4 quarterly. You also add the premium income to each of these 12 to 24 pay periods. The benefits of compound growth also rises to 12 to 24 cycles per year instead of the typical 4.

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