By Warren Kaplan
The Stock Option Writer
© Warren Kaplan 2011-2017
March 29, 2017
March 29, 2017 - Back in 1962, I was working on my Master degree (downtown CCNY) and one of the classes I took was in the advantages of price appreciation verses income in managing a portfolio. The professor, during the day, was an investment advisor for New York Life. At this time, I worked for Reynolds & Co a stock brokerage firm. I had recently gotten my grandmother Nellie, to buy 10 shares of Celanese Pfd. It provided her with a yield of 8%. The shares cost her $28 per share and at that time, she was my biggest client. My grandmother wanted a return of her capital and she trusted me. Frankly, my grandmother did not trust anyone but she really liked me. The reason I am telling you all of this is because the professor said I should have bought her something that I felt had price appreciation and then sell off some stock every year. My argument was that older people don’t like to sell off things and that a dividend income was much more comforting to them. To this day, I know I am right. What do you think?
I grew up in the basement of an old tenement apartment in the Bronx. Since the neighborhood was poor, I never felt poor. We had our street games like stick ball and box ball on the sidewalk. Ladies would sit outside watching the neighborhood and chatting about what ladies talked about. Me and my friends would look at their legs and pick the ones we liked. My dream was to one day have enough money saved so that I could receive $100 a week as interest income and retire. I don’t know how it happened, but I became aware of the stock market. When I was 13 years old, I had a Bar Mitzvah and after some of the money was used to pay for the party I used the balance of the gift money I received along with a $250 prize I won picking all 15 winners in a Daily News weekly football contest and had the closest actual scores. I picked 3 stocks to invest in. My mom was my custodian. I picked ATT, Con Edison and Sperry Rand (I could not afford IBM). I set those up under an MIP (Monthly Investment Plan) championed by Merrill Lynch. I had a total of $500 to invest among the 3 companies. I added money by working after school I made by delivering packages to ladies who bought at the local neighborhood grocery store. I worked for tips. Later, I did the same for the local laundry and got 10¢ a package plus tips. Later still, I worked in a local bowling ally setting pins. I got paid per line of play plus tips. The danger was the flying pin by the hard bowlers. Date night was Friday and Saturday nights and the slow gutter-bowling ladies made it a long night as the bowling ball slowly moved down gutter lane. So why am I telling you all this? Because I want you to know that I was right and the professor was wrong. By staying focused on dividends and their compounding effect, you will amass a ton of dough to be spent in your later years. The thing is, today you have more options to pick from and over the years, I have found safety to be extremely important. I have had individual stocks go bust on me such as Bethlehem Steel, Kmart, Asia Pulp and Paper. I have seen once great companies go under such as General Motors, Polaroid and Corvette (a retail chain), Enron, World Com and Linn Energy. In order to SWAN (Sleep Well At Night), I have been using ETFs for a number of years. Sure I have some individual stocks but I spend my life writing stock options thereby adding to my dividend income. If you want to learn about options, then just buy Michael Sincere’s Understanding Options. Then combine that knowledge with Ben Reynolds’s firstname.lastname@example.org. You can buy the individual dividend growth stocks or buy matching ETFs. The beauty of growing dividends is that you do not have to sell shares (pay taxes) in order to live. If your money grows in a Roth IRA, you do not have to pay income taxes upon withdrawal. The dividends will give you the spending money you crave. Money is like oxygen. You need it in order to live.
How many ETFs should you own? Well, there are thousands of them available. They are difficult to write options on them. In my opinion, some of the best are managed by Wisdom Tree. In particular, I like DGRW and DON. To match S&P Aristocrats, I use NOBL and SDY. There are differences in the portfolios and that is one of the nice things about being diversified. I may change my mind in the future. I do not use the ETFs as trading vehicles and I let the compounding of dividends do the work for me. The longer your time horizon, the greater will be the results. I can’t keep up with technology but there are even some ETFs that specialize in that growth area. What about a return to the conditions of 2008-2009? Well sure it can happen. It probably will and your income will be affected. So as your income goes down, so will the price of what you buy. Many brokerages do not charge a commission for buying or selling ETFs. This allows you to buy as little as one share and there is no commission charge. So you can accumulate change from your spending and when the jar is filled, you buy a share or two of your favorite ETF.
Your only concern should be your health.
Warren Kaplan has been writing options for 50 years. He has been a stockbroker, investment banker and brokerage owner. He currently owns and operates Kaplan Asset Management, a provider of financial assistance for small to middle market businesses. He has more than a half-century of experience in dealing with financial markets, giving guidance and consulting with management, and assisting in the development of business strategies and solutions. The Company has assisted and consulted many successful companies, such as Natures Bounty (NBTY) and Action Products International (APII), helping them to go public and trade on the NASDAQ stock exchange. His philosophy is to “do something with the profits.” “If you make $100 in the stock market, take 50 percent and invest it back into the market. Then, take the other 50 percent and buy yourself something.”
Additional disclosure: I am not a registered investment adviser and I do not give investment advice. Nothing in this article should be construed as investment advice. Investors are encouraged to do their own research and seek the advice of an investment professional before investing. Writing options is not for everyone. This article was written for informational purposes only.