Cash Flow for Charity, and More

Welcome everyone to another episode of We're Talking Money. I'm Dustin, wealth manager here at the firm. We have a very exciting show for you today. We have our senior portfolio manager joining us, Roger Fuller. Roger, how are you?

Hey, I'm doing great. I'm excited to be here. It's gonna be a great show tonight. Tonight we'll be talking about cash flow, generating cash flow into your account that you can use at year end for either Christmas shopping, donating to charity or reinvesting.

Wow, that's a lot. Well, stay tuned, we'll be right back. We're looking forward to talking to you. Don't miss this.

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Welcome back everyone. Like I mentioned before, we have a very exciting show. We have Roger joining us today. Roger, thanks for joining us.

It's my pleasure. I'll tell you, six years behind the desk here, you guys finally let me in front of the camera, so I appreciate the opportunity.

That's not true. We try to get Roger on every week, but finally he's here joining us. Roger, what are we talking about today? What have you built fairly well?

Sure. So today's gonna be a little bit of a follow-up from last week. Last week we talked about different ways to get to charity, rather using a qualified charitable distribution, maybe donating some high-priced securities, or maybe just giving cash out right. Well, today we're going to talk about ways to generate cash flow in your account, so that way you're not handcuffed by the market, what the market's doing. You're not giving away principal, you're actually generating cash flow throughout the year they can use for either Christmas shopping at year end, you can use to reinvest, or you can help use to support your favorite charities.

Interesting. So we're talking about generating cash flow inside of these accounts so we can use that for charity as opposed to using your principal. So talk to me a little bit about what strategies you're using to generate this cash flow.

Sure. So my dad has been this business since the 1960s, and back in 1970 he started doing what's called covered calls. Covered calls is the least aggressive option strategy, and covered calls is used to generate cash flow, give you some downside protection and give you a kind of a disciplined sales strategy. So that's what we utilize in our portfolios. We've been utilizing them here at the firm for quite some time. Done properly, should generate between a two to five percent cash flow an entire portfolio, even if we're only using it on a portion of the portfolio.

Wow, so two to five percent on the portfolio of cash flow. So for those of you that don't know, Roger, can you talk to us a little about what a covered call is? Can you just talk us through how it works and what we should know about it?

Yeah, absolutely. So a covered call is actually a contract, a contract that is obligating you to sell a stock at a certain price within a certain time frame only if your stock goes above that certain price.

So some of the advantages of doing covered calls is, one, it does generate the cash flow. Two, it gives you some downside protection in the market, so it kind of helps you out if we're having a flat market, a little bit of a down market. It also lowers overall portfolio risk, so it helps lower the beta in the portfolio.

It also gives you a disciplined sales strategy. And what I mean by that, so if we sell a covered call and we agree to sell it at a certain price, which is well above where it is today, and that stock happens to go through that price, then we will sell it. We'll take those gains and reinvest them into a different stock. However, we usually don't write covered calls on an entire position, so you still have some of your position taking full advantage of that appreciation while using a disciplined sales strategy to sell the other portion.

Gotcha, that makes sense. So we have a position, or a stock in this example, and we're writing calls on a portion of it, not all of it, so if the stock does end up going way through the strike price, we can still essentially recoup some of that gain.

Right. We're participating in all the appreciation of those shares and a limited appreciation of the other shares, but that's a predetermined amount.

Gotcha. So I think you already answered this somewhat, but you talked about the advantages of the covered call, so it sounds like there must be some disadvantages as well.

Sure. So the disadvantage is, you are putting a limit on your gains. And so when we sell a covered call, we try to make sure that limit is acceptable to the portfolio and for the risk that we're taking. So if we can take a short time frame, maybe 30 to 60 days, and know we're going to get a significant increase in that stock, then we're okay taking some of the money off the table.

Okay. And so what accounts is this best used in, this covered call strategy that you're talking about?

Absolutely. Well, covered calls are a taxable event. The good news is, or what makes them unique, is that money goes into your account the day you sell the covered call. However, it's not a taxable event until that option actually expires. So for example, on portfolios we sell covered calls in today, that money is in your account, you can go spend it on Christmas presents or do whatever you want with it, but you're not paying tax on it until it expires. And so if we write those covered calls from January, February of next year, you're not paying tax on it until 2023.

IRAs are really great for covered calls because obviously there's no tax consequences for IRAs. All that money is tax deferred. It's great for retirees' accounts that are individual accounts or brokerage accounts, because they're usually in a lower tax bracket. Any investable account that has tax losses that they've forwarded, that way we can offset those losses, will help offset the gains.

And of course, in any taxable account, by year end we actually try to do tax loss harvesting. So anything that we have a loss in, we take those losses to offset the cash flow that's been generated throughout the year, to try to negate as many gains as possible while still keeping the money invested.

Sure. That's interesting. We talked about tax loss harvesting maybe a few weeks back now. I think we should do a whole show on that and get you to join in, Roger.

Absolutely. There's a lot of ways that we can do that to help minimize taxes on those taxable accounts. But again, covered calls, great way to generate a cash flow, a great way to build that money up throughout the year, so at the end of the year, no matter what the market's doing, whether the market's down like unfortunately it's been the last couple days, or is that an all-time high, you've already built up that cash flow that is set aside for your charitable giving, Christmas shopping, reinvesting, whatever you want to use that money for.

Sure. Well, thank you Roger again for joining us. We hope to have you on the show many, many more times. We'll do that tax loss harvesting episode here in the near future. If you want to hear more strategies like this, we're going to have Roger readily available to do more of these shows. Be sure to like, be sure to follow. If there's anything you want us to talk about specifically, be sure to comment, and then share the video as well. And if you would like to talk to Roger about anything, whether it's the covered call or anything else that we're doing inside of our portfolios to generate more of this cash flow that we're talking about, feel free to reach out on the website and we'll be sure to reach out to you. Thanks for joining us and have a great night tonight.

Appreciate it, guys. Have a great day.

Thanks for joining us on We're Talking Money. Be sure to visit us at omnistarfinancial.com, where you can learn more about how we provide value to our clients. Subscribe to the show and our newsletters, and drop us a line with topic suggestions for upcoming shows. If you enjoyed the show, we would appreciate you passing it on to a friend and providing a rating on iTunes.

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