The Best Way To 'Buy The Dip' For Income Investors

As long-term dividend investors, our goal is to maximize income while also protecting and maintaining our capital base. That said, dividend investors often struggle with the decision of when to put new money to work. Sitting on idle cash is hard (because it is not generating any income), but it's also difficult to buy a stock that has run up significantly (as downside risk is higher). The great Benjamin Graham ("the father of value investing") popularized the term Margin of Safety in 1934. According to Graham, an investor should only purchase a stock when the market price is significantly below its intrinsic value. Essentially, a Margin of Safety provides room for error on an investor's purchase decision. Ideally, we would only buy stocks that have a Margin of Safety...but in reality that isn't always possible.

A cash-secured put involves writing an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock. We believe that selling cash-secured puts is a great, conservative way to generate income while patiently waiting for the appropriate "Buy Zones" on dividend stocks that you are considering adding to your portfolio. Balancing income and capital preservation is extremely important for income investors. Maximizing income is clearly important in the short-term, but capital preservation is critical over the long-term (as this is your means of generating future income). A cash-secured put strategy is a great compliment to a long-term dividend portfolio as it will help you generate income on idle cash with a built-in margin of safety.

Source: Seeking Alpha

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