How investors can generate income as the Fed takes the training wheels off the market

Published Sun, Aug 22 20217:33 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

The stock market has wobbled a bit as the Federal Reserve moves closer to slowing its asset purchases and the spread of the delta variant of Covid-19 raises concerns about economic growth . For investors closer to retirement age looking to preserve their money, a spike in volatility could be a sign to look for income-generating investment ideas. There are many popular ways to find dividend stocks, including looking at the so-called dividend aristocrats, which are typically defined as stocks that have increased their payouts per share for at least 25 years. However, Kevin Simpson, the founder and chief investment officer of Capital Wealth Planning, said it is important for investors looking to pick individual stocks to focus on names that provide strong growth and not get bogged down with rules of thumb. "I don't think you need to specifically look for companies that have 25 or 50 years of dividend growth. We look at it as more of a five-year period and say 'show us companies that for the past five years have increased their dividends by 10-to-15%' and generally you're going to have a really successful portfolio there," he said. The pandemic added another wrinkle to this process, as some companies pre-emptively paused their dividends as management waited to see how the upheaval of everyday life impacted their businesses. Pausing dividends in 2020, according to Simpson, should not be a "red flag" for investors. "Smart management is going to be fiscally responsible and not try to necessarily raise the dividend simply because that's what they've always done. Now, if a company suspended its dividend or cut its dividend, in our portfolio we remove those positions," he said, adding that those stocks could be candidates to rejoin the fund if the dividend is reinstated. Capital Wealth's enhanced dividend income portfolio includes names like Chevron , Nike and Johnson & Johnson , as well as tech giants Apple and Microsoft . Simpson said those tech stocks make sense in the portfolio even if their payouts are low because the share prices have performed so well, making a strong total return, and that investors should have broad exposure to minimize sector risk. Capital Wealth does not use a minimum dividend yield as part of its selection process, allowing it to add stocks that may have low payouts now but with the potential for strong dividend growth in the years ahead. Dividend growers For investors looking to pick their own income plays, the list below shows some of the biggest stocks in the S & P 500 that have hiked dividends over the past year and have payouts of at least 3%. The stocks also have strong future earnings per share growth prospects, according to estimates from FactSet. To be sure, investors should be wary of stocks with abnormally high dividend yields. In some cases, that can be a sign that professional investors think a dividend cut could be coming in the near future, making the stock seem momentarily cheap. Additionally, there are exchange traded funds that target dividend stocks, such as the Vanguard Dividend Appreciation ETF , if investors want a broader exposure with less individual research. Outside of dividends, another income generation strategy is selling covered call options. With a covered call, an investor sells a contract to an options trader that gives the trader the right to buy a stock that the investor currently owns at a set price in the future. Essentially, the seller of the contract gets money up front, while the buyer of contract gets potential upside if the stock climbs above the pre-set strike price. "Covered call writing is a means of reducing portfolio risk, and the trade-off is you forfeit some upside," Simpson said. "But I would forfeit some upside all day long to help navigate some of the downside."

Journalists are reflected in the sunglasses of drilling site manager Greg Murphy during a media day at Chevron's site in Pungesti, Romania, April 8, 2014.

Bogdan Cristel | Reuters

The stock market has wobbled a bit as the Federal Reserve moves closer to slowing its asset purchases and the spread of the delta variant of Covid-19 raises concerns about economic growth.

For investors closer to retirement age looking to preserve their money, a spike in volatility could be a sign to look for income-generating investment ideas.