Pat McKeough responds to many personal questions about specific stocks and other investment topics from the members of his Inner Circle. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for the Inner Circle.
This week, one question from an Inner Circle member concerned a fund that holds gold stocks. The fund’s high distributions give it a substantial dividend yield. Pat examines whether it can sustain its yield and also looks at its policy of using call options to boost returns.
Q: Pat: What is your recommendation on Faircourt Gold Income Corp.? It pays a high dividend. Thank you.
A: Faircourt Gold Income Corp. (symbol FGX on Toronto; www.faircourtassetmgt.com), mainly invests in large- and mid-sized gold producers that are part of the S&P/TSX Global Gold Index.
The company holds mostly high-quality stocks, including Barrick Gold, Detour Gold, Franco-Nevada Corp., Freeport-McMoran Copper & Gold, Goldcorp, Kinross Gold, Newmont Mining, Yamana Gold and New Gold.
Faircourt pays a high 7.2% dividend yield. To meet its high distributions, the company may use capital gains on its investments to increase its cash flow.
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Covered call options used to boost returns
As well, the company writes call options to boost returns. Call option holders have the option to buy the underlying shares from the company at a specified price. The company earns a premium on the call option whether or not it’s exercised
When the market rises, call holders exercise their calls and you sell your stocks at a fixed price. If prices drop and you sell those stocks, however, your calls are no longer “covered.” Regardless of market trends, brokerage commissions must also be factored into the costs.
In the most recent Inner Circle Q&A, Pat looks at whether Faircourt can sustain its high distributions and yield. He also examines in detail the impact and potential risks of covered call writing as well as the fund’s strategy of using capital gains on investments to boost distributions. He concludes with his clear buy-hold-sell advice on this stock.
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