A safer way to invest in Apple?

Apple may be too risky for your retirement portfolio. Check out this closed-end fund instead.

By TheStockAdvisors Jun 6, 2012 12:05PM
By Brian Hicks, Wealth Advisory

Apple (AAPL) is the greatest cash-generating company the world has ever seen. In just its first quarter, its cash pile grew from $98 billion to $110 billion. Think about that for a minute . . . 110 billion dollar bills would fill 50 Olympic swimming pools.

The rate at which it is putting cash in the bank is truly remarkable. And the tech giant could add another $40 or $50 billion to that stash by the time we ring in 2013.

But the real secret to Apple's incredible success are the gadgets it's introduced to the market. People want them -- and will pay a premium for them. Apple has sold 335 million of its i-gadgets and profit margins are far higher than any other hardware company. 

And who knows, with Apple TV on the way and another version of the iPhone, the cash could pile up even faster than I estimate. 

Sometime in its fourth quarter, which starts July 1, Apple will reward shareholders with the first quarterly installment of its $2.65 annual dividend. Apple acknowledged that part of the reason for paying a dividend is to attract retirement investors, including institutional investors who manage income and retirement portfolios. 

The question is: Is Apple a good stock for individual investors who are actively
involved in their own retirement planning?  

Given the rate at which Apple is growing its earnings and cash position -- combined with the attractive valuation (forward price-to-earnings ratio of 10) -- it's tough to argue that there isn't upside for both the stock price and the dividend.

But Apple has two things that keep it from being the perfect retirement stock: a $550+ share price and a sub-2% dividend. 

So we got busy investigating the best ways that individual investors can use Apple to help fund their retirement. And we've found an investment that's heavily leveraged to Apple, pays 9.3%, and has as much as 10% annual upside. 

In other words, it's such a perfect way to use Apple stock for market-beating returns, we've dubbed this investment "the iRetirement Plan." 

The Nuveen Equity Premium Advantage (JLA) is closed-end fund that's nearly 12% invested in Apple -- the highest of any fund we've been able to uncover. 

JLA also pays a 9.5% dividend, and trades at a discount to net asset value (NAV) of 11.5%. In addition, management fees are under 1%, which is very good for a closed-end fund with such an attractive dividend. 

The Nuveen Equity Premium Advantage Fund is an equity option fund. That means it sells call options to boost its performance, raise cash for dividend payments, and create a measure of downside protection. The fund's secondary objective is capital appreciation of the stocks it holds. 

Now, we expect that individual investors may have reservations about investing in a fund that uses call options to generate income. Investors should understand that selling call options is a conservative income strategy. 

For the last three years, the Nuveen Equity Premium Advantage Fund has averaged 15.5% gains, while the NAV has risen just 13%. 

Now, it's not unreasonable to think that you might get +20% a year from Apple for the next few years. After all, it's growing earnings at a much faster rate than that. 

The point is for retirement savings, the reliable income and stable share price make the Nuveen Equity Premium Advantage Fund a better option. 

Investors will see the share price rise as Apple's stock price rises.  And the fact that the fund generates income with call options means it is less vulnerable to stock market corrections. 

Over the last few weeks, Apple shares have fallen around 15%. But the Nuveen Equity Premium Advantage Fund has performed much better -- down just 2%.

Once Apple starts paying a dividend, that will increase the cash flow to the Nuveen Equity Premium Advantage Fund. It would be reasonable to expect the fund to pass the added income on to shareholders. So the current 9.5% dividend could quickly become 10.5% or even 11%.

We rate the Nuveen Equity Premium Advantage Fund a "strong buy" under $12 a share and believe it represents an excellent way for you to collect market-beating dividends and maintain exposure to Apple common stock. 

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