Yield and income

July 2, 2020

When yield dries up, alternatives are needed

Last week the US Federal reserve announced a cap on big bank dividend payments and barred share repurchases until at least the fourth quarter of 2020, after finding lenders faced significant capital losses when tested against an ongoing economic downturn from Covid-19.  

This news is yet another hit for investors relying on income – most often retirees, having already taken a hit earlier this year with dividend cuts in the US, UK Europe and Australia.  

The Fed stipulated banks cannot pay more than they did in the second quarter, and payments cannot exceed average net income over the last four quarters.

High yielding stocks tend to be punished more

The issue for retirees is compounded by the fact that most of the dividend cuts over the last 20 years have come from stocks with higher dividend yields. In fact more than half of dividend suspensions and reductions since Jan 2000 came from stocks with dividend yields ranked in the top 25% relative to their own 3-year history.  

The uncertainty from Covid-19 shows no immediate end, and the resulting economic downturn is already proving to be more severe than the previous two recessions when looking at dividend cuts and stock performance.  

So for investors and retirees in particular having a source of income not reliant on dividends is crucial.  

The Talaria process creates this diversified source.

It does so by not relying entirely on the stocks themselves, but in the process of buying them. Selling put options to enter stock positions generates a premium for the potential buyer, regardless of whether the stock is ultimately bought or not. It creates:

  • more consistent income,  
  • a downside buffer to first loss,
  • reduces portfolio volatility, and
  • diversifies the sources of return.

This means that in periods such as now, investors have somewhere else to go for income.  Further, as option premium increases with volatility, so in most cases does the income from this source.  

This is the world we are currently in, and likely to be for some time.  

Talaria's strategy delivers a consistent source of income generation

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