Ep. 66: Income Across Asset Classes, Tactical Covered Calls & Insider Buying Signals

Imagine buying a fund with this massive 10% yield, right, and you're thinking you have
just completely solved your retirement income problem.
Oh, yeah.
The dream.
Exactly.
You get those fat monthly payouts.
You feel great about your portfolio and then boom, April rolls around.
And reality hits.
Right.
Your accountant calls to tell you that the government is actually treating 75% of that yield
as your regular day job salary, taxing it at your highest marginal rate.
It's brutal.
Just brutal.
It is.
And that scenario is the exact trap that millions of yield chasing investors are just walking blindly
into in 2026.
So welcome to today's deep dive.
Glad to be here.
Our mission for you today is unpacking a really massive stack of sources.
We've got Morningstar data, analyst reports, and these deep dives on engineered ETS.
We're going to figure out where the real, reliable yield actually lives in this wild market.
And maybe more importantly, where those hidden landmines are buried.
You know, what's fascinating here is that finding yield today isn't just about screening
for the highest percentage payout.
It hasn't been for a while.
No, not at all.
Right.
It's really about pulling back the curtain on the mechanics.
Are you getting paid from a physical asset in the real world?
Or are you getting paid from a company's free cash flow?
Or from some crazy financial engineering?
Exactly.
Heavy, complex financial engineering.
Because the desperation for income is just palpable right now.
I mean, the demographic shift alone is staggering.
Yeah, the oldest baby boomers are hit in 80 and the youngest are in their 60s.
So you have this swelling population of retirees with an enormous structural hunger for cash flow.
They need that money to live.
And they're hunting for that cash flow while the economic ground is essentially shifting
underneath them.
I mean, we are looking at April inflation running hot at 3.8%, which is not what anyone wanted
to see.
And a lot of that is being driven by energy costs plus the severe geopolitical impacts
of the war in Iran.
Which means before we go chasing those double digit engineered yields, we really have to look
at how traditional foundational assets are holding up under this specific stress.
Right.
The stuff people usually rely on.
Yeah.
Like, core bonds.
Historically, they are the ultimate safety net.
And right now, they're yielding around 4.6 to 4.7%.
But there's a catch there.
Right.
Because inflation fears have driven treasury yields up, bond prices drop.
So those core bonds are actually slightly negative for 2026 in terms of real inflation-adjusted
return.
Yeah.
Inflation eats the yield and the price depreciation eats the principle.
That's a tough spot.
So investors are forced to look elsewhere.
And the Morningstar data and recent analyst reports, they're heavily pointing toward oil.
Specifically, Exxon mobile.
Yeah.
Exxon is a huge focus right now.
Because the Iran war has pushed oil over $100 a barrel.
And because of that, Exxon's 2026 revenue is projected to hit an unbelievable $391 billion.
That is just a massive number.
It's a 21% year-over-year jump.
And the underlying analysis from the sources suggests the stock is actually significantly
undervalued right now based on its discounted cash flow fair value.
But DCF.
Right.
That metric is crucial.
It basically strips away the market's current mood swings, you know, and calculates
what the pure, raw cash the business will generate over its lifetime is actually worth
today.
So what's the gap there?
Well, the analysts peg that intrinsic value at $254 a share, yet it's trading near $151.
That's a huge discount.
It is.
The fundamental argument here is that every household with a gas-powered car should hold
oil exposure to mechanically hedge against those rising fuel costs.
Okay.
But holding Exxon stock to offset the pain at the gas pump is like, it's like owning shares
in the casino to hedge against your own gambling losses.
That's a fair point.
I mean, yes, it technically works on a spreadsheet, but it is a pretty dystopian way to build a portfolio.
It's purely pragmatic, but yeah, it feels a bit grim.
I want to look at the traditional dividend growers, the defensive stalwarts.
Let's talk about McDonald's for a second.
Okay, McDonald's.
They are approaching dividend king status.
That means 49 years of consecutive dividend hikes.
Almost half a century of raising the payout.
Exactly.
And they pay a reliable yield of nearly 2.6 percent or 2.57 to be exact.
However, the stock itself is down 11 percent over the past year because of the consumer pullback.
Right.
Consumers are aggressively pulling back their spending due to sheer affordability issues and recent
tariffs.
But even with that consumer pullback, McDonald's still commands operating margins over 46 percent.
It's incredibly resilient.
It can afford to pay the dividend even when foot traffic slows down.
But you know, they aren't the only stalwart taking a beating.
You see a very similar story in the 5 percent yielders.
Like Prudential.
Yeah.
Prudential financial pays out 5.4 percent, but they are trading at the absolute low end of their
historical valuation.
Though the potential situation is highly localized.
Oh, right.
The Japan issue.
Yeah.
Japanese regulators uncovered misconduct involving improper sales practices in their life insurance
division.
Basically, forced Prudential to suspend new sales in that region entirely.
And insurance companies survive on that constant inflow of new premiums to invest, right?
Exactly.
When you bottleneck a massive geographic market like Japan, the overall valuation naturally
plummets.
And that drives the dividend yield up artificially.
And then you have paychecks currently paying a 5 percent yield.
For context, there are 5-year averages closer to 2.8 percent.
Huge jump.
It's trading at a historically low multiple of 16 times earnings because the broader market
is just terrified of AI disruption.
The fear of being replaced.
Right.
If artificial intelligence can autonomously handle tax compliance, onboarding and benefits
administration, the fear is that companies won't need to outsource to paychecks at all.
The market is essentially pricing in a Doomsday scenario for human resources software.
Okay.
Let's unpack this.
If bond yields are negative for the year in real terms and traditional safety stocks like
McDonald's, Prudential and Paychecks are dropping double digits in market value because
consumers are tapped out or AI is taking over, aren't these supposedly safe anchors actually
leaking money?
Well, you have to separate leaking market value from leaking cash flow.
Okay.
How so?
That is the critical distinction for an income investor.
Take paychecks.
They have a payout ratio of about 80 percent backed by highly recurring revenue.
Right.
Companies don't just stop doing payroll.
Exactly.
Even if AI takes market share in the future, payroll compliance today is incredible.
It's incredibly complex and heavily penalized if done incorrectly.
Very few businesses are ripping out their entire payroll infrastructure overnight.
That makes sense.
And McDonald's has a free cash flow payout ratio around 71 percent.
The underlying cash generation machinery of these companies is completely intact, even if
the daily share price is taking a hit from macroeconomic panic.
I hear you, but it is still agonizing to watch your overall portfolio value drop while
you collect a tiny 2.5 percent yield.
It takes a strong stomach.
It does.
And because those traditional safety nets are struggling to keep up with 3.8 percent
inflation, our sources suggest pivoting to the physical infrastructure that actually powers
the economy, the incredibly boring sectors that most investors ignore.
Oh, absolutely.
We have a blueprint in the sources from 24-7 Wall Street detailing a $475,000 model portfolio.
I love this part of the data.
It's great.
It is quietly generating $2,800 a month in income.
And it's entirely through midstream energy and master limited partnerships or MLPs.
Tickers like ET, HESM, MPLX, SNN, and WAS.
Exactly.
I always hear MLPs described as the coal roads of the energy sector, but a better way to
look at them is as the central nervous system of the grid.
That's a much better analogy.
Because they don't pull the oil out of the ground and they don't sell it at the gas station,
they just charge a fee to move it through their pipes.
Let's use enterprise products partners, Ticker, EPD to understand the mechanics here.
They hold an A-credit rating, which is the highest of any midstream company.
Very safe debt profile.
Yeah.
And they operate 50,000 miles of pipelines plus these massive export fungilities on the Gulf
Coast.
And the current global energy shortage, deeply exacerbated by the Middle East conflict,
has just skyrocketed demand for their natural gas liquid exports.
It really has.
They offer a 5.6% yield supported by long-term contracts that have built in inflation escalators.
Meaning if inflation goes up, the fees they charge to move the energy go up automatically.
Right.
It's mechanically tied to inflation.
But, and we have to mention this, holding an MLP introduces a unique tax situation for
you, the listener.
They issue a Schedule K1 tax form instead of a standard 1099.
The K1 is essential to understand.
An MLP is a pass-through entity.
So instead of the company paying corporate tax and then you paying tax on the dividend,
which is double taxation, the MLP passes its raw income directly to you.
It is highly tax-advantaged and shelters your payout.
But it definitely makes your annual tax returns significantly more complicated.
You'll probably want a CPA if you hold a lot of K1s.
Definitely.
Now beyond pipelines, real estate investment trusts or REITs fit perfectly into this physical
cash machine category.
The analyst reports heavily feature NNN REITs yielding 5.4%.
A very solid yield.
They own about 5,700 single tenant retail properties.
But they specifically target businesses you physically have to visit.
We're talking automotive service centers, convenience stores, restaurants, things you can't
just buy on Amazon.
And the beauty of NN is they utilize triple net leases.
This is a massive structural advantage during an inflationary period.
Whereas under a standard lease, the landlord eats the rising costs of maintenance and property
taxes, right?
Exactly.
But under a triple net lease, the tenant is legally responsible for paying the building's
insurance, the structural maintenance, and the real estate taxes.
So NNN's costs are essentially fixed.
Making their cash flow highly predictable, almost like a bond.
Now here's where it gets really interesting.
Morningstar issued a pretty stark warning about MLPs in our data stack.
They did.
A broad MLP composite index yields over 8%.
But it is incredibly concentrated.
The top five companies make up 50% of the entire index weight.
That's a lot of concentration risk.
And furthermore, this exact index plunged 30% in 2020 while the broader US market jumped
21%.
It was a rough year for energy.
So I have to ask, are we just looking at yield trap disguised as physical infrastructure?
It's a fair question.
But you have to look at the underlying distribution safety, not just the temporary price volatility.
The MLP index did crater in 2020 when oil futures briefly went negative during the pandemic
shutdowns.
Right.
People couldn't even give oil away.
The market panicked.
But companies like Enterprise Products Partners did not cut their payouts.
The actual cash flow generated from those fixed fee pipeline contracts was highly insulated
from the commodity price swings.
Because they're just charging the toll.
Exactly.
We actually boasts 27 consecutive years of distribution growth.
They completely sailed through the 2020 crash without a single payout reduction.
Wow.
Okay.
So structural safety and pipelines and triple net real estate can securely get you that 5 to
6%.
But our sources also outline strategies for targeting a much higher numbers, like 10 to 20%
yields.
This is where things get a bit more intense.
Right.
We are moving from physical assets to tracking the millions of dollars moving behind closed
doors.
This strategy relies on one very specific metric where company insiders are actually risking
their own personal money.
It is a calculated behavioral strategy.
When executives and directors buy their own stock on the open market using their own post-tax
dollars, it signals supreme confidence in the underlying business metrics regardless of
prevailing market sentiment because they know what's going on internally.
The prime example in the stack is Mill Road Properties ticker MRP.
It yields 11.38%.
Almost 11.5.
It's a land banking rate spun off from Lanar.
The director and the chief operating officer just dropped over $6 million of their own cash
into this stock.
And their business model is fascinating.
It bypasses the traditional risks of real estate development.
They don't actually build the houses.
No.
They buy raw land under option agreements for major home builders.
The builders pay MRP non-refundable deposits and monthly fees just to hold the land until
they are ready to construct.
Ah yeah.
They control 143,000 home sites across 30 states.
So they are effectively monetizing the massive US housing shortage without taking on any of
the construction or materials risk.
And they aim to pay 100% of their adjusted funds from operations as dividends.
For anyone unfamiliar, AFFO is basically the truest measure of a real estate company's cash.
Right.
It strips out paper gains.
And subtracts the cost of keeping the lights on, leaving you with the actual cash available
to hand out to shareholders.
Then we have Hercules Capital, ticker HTGC.
It yields over 12%.
Which is huge.
It's a business development company.
Now a short seller named Hunterbrook recently published a massive hit piece on them, completely
tanking the stock.
In response, the insiders immediately bought $2.8 million worth of shares.
And those insiders, they are looking at the foundational health of their loan portfolio.
Hercules has a dividend coverage ratio of 120%.
Meaning they generate significantly more cash than they actually pay out.
Crucially, their non-accrual rate is barren 1%.
Explain that for a second.
A non-accrual loan is one that has stopped paying interest.
Having only one tenth of 1% of your loans in default is just best in class for the sector.
That's incredible.
And then there's Soundpoint Meridian Capital, ticker SPMC, a massive 22% yield.
22%.
Just wild.
It is a collateralized loan obligation or CLO fund that launched in 2024.
A CLO fund essentially buys tranches of loans made to heavily indebted lower credit companies.
High risks.
Yeah.
It had a terrible first year, got crushed, and actually had to cut its dividend.
Yet insiders just bought $6 million worth of shares as it attempts to rebound.
Well CLOs are inherently high risk.
They are historically mediocre long-term performers because they hold risky debt.
But when the credit cycle turns favorably, the immediate cash flow they generate can be staggering.
And the insiders are betting on that turn.
Exactly.
But I have to challenge this entire follow the insiders narrative, especially regarding
the Hercules capital situation.
Go for it.
Short seller publishes a deeply researched hit piece.
The stock tanks and executives step in to buy the dip.
Isn't the retail investor just getting caught in a high stakes game of chicken?
It can certainly feel that way.
What if those insiders are just trying to stop a panic, you know, just catching a falling
knife to save their own equity compensation?
How much should insider buying really influence your strategy?
I mean, information asymmetry is a real factor.
Insiders know their daily operations better than any external analyst ever could.
But your skepticism is entirely justified.
Executives can be wildly overly optimistic.
Or yes, they can try to artificially prop up a sinking ship.
Insider buying should function strictly as an alert mechanism, never as a blind buy signal.
You use the insider buy to flag the stock.
But then you must independently verify the math.
Do your own homework.
Always.
Mercury didn't have that 120% coverage and that 0.1% non accrual rate documented in their
SEC filings.
The insider buying would be meaningless noise.
Verify the math.
Don't just blindly follow the millions.
I appreciate that.
Absolutely.
Now, relying on individual stock picking and monitoring executive SEC filings requires intense
active management.
It's practically a full time job.
It really is.
So for the listener looking for a passive done for you high income approach, our sources pivot
to the exploding world of engineered ETF strategies, specifically covered calls.
Financial engineering has rapidly evolved here.
Asset managers are using derivatives to manufacture yield out of thin air.
The reports highlight Hamilton's innovations first.
They offer CMAX and IMAX.
CMAX gives Canadian investors exposure to the TSX-60.
But importantly, it strips away the 25% leverage that their older fund, HDIV, utilizes.
Which is a big deal for risk management.
Yeah, leverage basically means borrowing money to boost your yield, which works great until
the market dips.
At which point those borrowed funds heavily amplify your losses.
Removing that leverage makes CMAX much safer for 2026.
And then IMAX, on the other hand, is their first international covered call ETF.
How does that one work?
Well, IMAX targets develop markets exclusively, Europe, Japan, Australia, the internal structures
brilliant, they split the fund perfectly down the middle, half the fund is allocated to
IEFA, a very low-cost, broad, international ETF with no options written on it whatsoever.
Any other half?
The other half goes into IEFA.
It's an older, slightly more expensive fund, but one that possesses a massive, highly liquid
options market.
Oh, I see.
They blend the incredibly low fees of one half with the deep options liquidity of the other
half, keeping the total management fee down to just 65 basis points.
It's very smart structuring.
But the absolute heavy weight in the ETF stack we reviewed is QDVO.
It boasts a 10% yield, holds a 46% weight in the tech sector, and intentionally overweights
Nvidia at 12%.
It's drawing a lot of attention.
Investors are dumping massive, established funds like QQQI and JEPQ just to buy QDVO.
Why?
The differentiator is how they handle the upside potential.
Traditional, massive, covered call ETFs like QQQI routinely sell options on their entire
index.
They cap the upper mobility of every single stock in the portfolio to generate that high
monthly payout.
But QDVO utilizes tactical call rating, meaning they don't cover everything.
Exactly.
The fund managers actively select specific individual stocks to write calls against, allowing the rest
of the underlying portfolio to run completely uncapped.
So what does this all mean?
Selling covered calls on an entire index is like putting a speed limiter on a Ferrari.
I love that analogy.
Right.
It's a smooth, safe ride, but you will never actually see what the engine can do.
QDVO's tactical approach only puts the limiter on the tires that are already spinning, letting
the rest of the vehicle accelerate.
That perfectly illustrates the mechanism.
You capture superior capital appreciation while still securing a 10% yield.
And there was an entire underworld of hidden JEPFs, deploying similar specialized mechanics.
Let's look at SPHY.
It gives you S&P 500 exposure with an 8% yield.
But it doesn't just blindly sell calls.
Right.
No, it uses a fully financed options collar.
It's constantly maintaining a hedge to protect against sudden market drops between 5 and 20%.
Very defensive.
Then you have T-I-L-G, which yields heavily but explicitly.
Only writes covered calls on 50% of its tech holdings, leaving the other half to capture the
sector's aggressive growth.
Similar to IMAX's half and half approach.
Exactly.
You also have IDVO for tactical international income and OVL and BALI, which use large cap
active risk management instead of passive tracking.
OK.
But before anyone allocates a single dollar to these engineered strategies, we must address
the most critical warning in the entire stack of sources.
The tax reality.
The tax reality.
The tax trap regarding QDVO absolutely shocked me.
It's caught a lot of people off guard.
Throughout the year, these ETFs distribute interim 19a1 notices to investors.
Right.
The preliminary estimates.
Exactly.
For QDVO, those preliminary notices indicated that over 90% of the distribution was classified
as a return of capital or ROC.
Which sounds like a dream scenario.
Return of capital is generally not taxed as immediate income.
It simply lowers your original purchase price on paper.
You only pay capital gains tax years later when you finally sell the asset.
Yep.
So it looks like the ultimate tax-fishing income vehicle.
It creates a brilliant illusion of tax efficiency.
But those interim forms carry a disclaimer that they are not for official tax reporting.
Oh.
When the actual year-end primary layout report was finalized, the reality completely inverted.
75% of the total distribution was reclassified as ordinary income.
Wow.
Only 14% was treated as qualified dividends, and a mere 11% was actually a return of capital.
That is a devastating land mine.
If you hold that asset in a standard taxable brokerage account, you are suddenly paying
your highest marginal income tax rate on 75% of that massive 10% yield.
It's painful.
It fundamentally destroys the math on your actual take-home return.
Which serves as a harsh reminder for anyone listening.
You must always analyze the finalized year-end tax reports of these funds, never the interim
estimates, before committing capital in a taxable account.
That is fantastic advice.
Well, we have covered incredible ground today.
We really have.
For you, the listener, navigating the 2026 market and building a resilient income portfolio
means abandoning the idea of a single silver bullet.
You need a highly vetted mix.
Diversification is key.
You might require traditional inflation anchors like Exxon or defensive stalwarts like McDonald's,
looking past their current market dips to their underlying cashflowers.
You absolutely need the boring, predictable physical cash generated by mid-stream pipelines
like enterprise products partners or a trouble net real estate like NNN.
The central nervous system of the economy.
Exactly.
You can potentially accelerate your yield by tracking insider buying in assets like Hercules
Capital, provided you rigorously verify the underlying debt metrics.
And if you wait into the world of engineered ETFs like QDVO, you have to understand the underlying
mechanics and the brutal tax implications.
That synthesis points directly to a final concept I want you to consider.
It's an idea running beneath everything we've discussed today, the yield illusion.
The yield illusion unpack that for us.
Consider the math.
If you purchase an engineered ETF yielding 10%, but 75% of that payout is taxed heavily as
ordinary income, your true in-pocket return is drastically reduced.
Contrast that directly with a traditional business like McDonald's.
It only yields around 2.5% on the surface.
That money is compounding tax deferred within the business.
The company is actively buying back shares to increase your ownership stake and they are
organically growing that payout every single year.
That's a huge difference in structure.
Exactly.
At what point does the psychological comfort of receiving a massive monthly cash deposit actually
make you significantly poorer over a 10-year horizon compared to a traditional dividend
growth strategy?
That is a profound question.
Are you buying the asset because the total return makes mathematical sense?
Or are you just buying it for the dopamine hit of the high monthly dividend?
It's something everyone needs to evaluate.
That is what you have to ask yourself as you look at your own portfolio tonight.
You don't want to spend your retirement chasing morages when the actual structural cash
flow is right in front of you.
Thank you so much for joining us on this deep dive.
Keep questioning your sources.
Always look past the headline numbers and we'll catch you next time.