Increasing your annual returns by just 1% over 30 years could raise your total returns by nearly 32%, while a 2% improvement would result in a 72% increase. These small improvements each year are powerful because of the magic of compounding.
Whether your ultimate objective is income generation or long-term growth, you can benefit from using three key methods to boost your returns. Most investors fail to use these approaches and miss out on easy gains.
So how exactly can you increase your returns using stocks you already own?
3 Ways to generate income from stocks you already own
Monetizing Your Shareholder Votes
As a shareholder, you have the right to vote in a company’s annual general meetings. However, most investors don’t exercise their shareholder voting rights because they are passive investors. In fact, nearly 72% of retail investors don’t use these rights each year.
If you fall in this category, then you may benefit from selling your shareholder votes. Rather than letting these unused assets go to waste, you can sell your votes on Shareholder Vote Exchange.
Shareholder votes are generally worth 1-5% of the share price. This means that a stock worth $100 may have votes trade for $1-$5. Someone who has invested $10,000 could generate $100-$500 per year by selling their shareholder votes, depending on which companies they have invested in.
Companies that are underperforming relative to their peers are more likely to have valuable voting rights. That’s because there is an opportunity at these companies for shareholders to take control and make positive changes. When an undervalued company can reduce costs, expand in growing markets, or improve their financing structure, they are often able to unlock value and raise their market capitalization.
Although a 1-5% increase might not seem like much at first glance, remember that compounding can add up to a lot over time. By reinvesting these proceeds to accumulate more shares, one can increase the growth rate of their portfolio.
Monetizing shareholder votes can raise your returns without needing to sell your shares, invest in bonds, or any other fancy tricks. It doesn’t impact your shares and you can continue to sell your votes for each annual meeting as they come up.
If you are looking for another way to generate income from your stocks, then selling call options might be the strategy for you. For every 100 shares of stock you own, you can sell 1 call option to create what’s referred to as a “covered call” position.
When you sell a call option, you’re making a bet that the price of the stock will not rise above a certain level, known as the strike price, within a fixed period of time. If you sell a call with a strike price above the stock’s current price, then you stand to make money if the stock stays exactly where it is. If the stock drops, you’ll also make money by selling this call option.
The only time the short-call option might lose money is if the stock rises above your strike price. But don’t worry, there’s a reason why they call it a “covered” call. Because you also own an equivalent number of shares, any losses from the short call will be offset by gains in the stock.
This aggregated exposure puts you in a unique position to benefit from the stock staying stagnant, going up, and even going down. And once your short call expires, you can sell more covered calls to generate continual income.
The main downside to a covered call is that it limits your upside exposure if the stock rallies beyond the strike price of your option. Any increases beyond your strike price won’t affect your overall profit, which will remain fixed because the long stock and short call offset one another.
This is the tradeoff that comes with selling covered calls. You get more stability and a higher probability of profit, but it may reduce the amount you make when the stock rises too rapidly.
For this reason, you should try to employ a covered call if you believe that a stock will have modest gains at best. Unlike selling shareholder votes, it may not be optimal in a bull market. You can learn more about the performance of covered call strategies on the CBOE’s website.
Lending Your Shares
A third method for generating income is to take advantage of share lending programs.
Institutional and retail investors often use margins to leverage their stocks by going long or short. But in order to do so, they must borrow shares from someone else who owns them. That’s where you and your investment broker step in.
Most brokers offer stock loan programs, which are a nice way to make extra money from your assets. If you enroll, your broker will loan out your shares to another investor who needs them. That investor will then pay interest for borrowing your stock. This tactic is good for long-term investors who aren’t planning on selling their shares anytime soon.
The main disadvantage of this approach is that it creates counterparty risk between you and the lender. If the lender goes bankrupt or is unable to return the shares they borrowed, then you are at risk. This risk is greater for stocks that have low liquidity or high volatility. However, most stock lending programs ensure there is sufficient cash collateral to mitigate this risk.
A second disadvantage is the lack of transparency and availability associated with securities lending. Your broker may take a substantial portion of the interest on the stock loan, and only share a nominal amount for you. Furthermore, the demand to borrow shares is inconsistent, so this stream of income may be unreliable.
And unlike directly selling your shareholder votes, this method may affect your financial exposure or tax status on dividends.
These three methods can be useful for those seeking to boost their current income or long-term returns through reinvestment. Alternative approaches for generating yield might include investing in dividend stocks, preferred stocks, or corporate bonds.
About the Author: Preston Yadegar is the Founder and CEO of Shareholder Vote Exchange. You can read his blogs on Medium and Substack where he covers shareholder activism, corporate governance, and financial analysis. Feel free to connect with him on social media.