How to Get a 9%-Plus Yield on the Dow Large-cap stocks are the safest place to be right now

I always love to find a strong-paying income investment that just so happens to be right where the upside action is. It’s no secret that large caps have been the go-to stocks for the first three months of 2011, at least from the vantage point of professional fund managers. The lower U.S. dollar does wonders for companies with more than 50% of their business done outside the United States, and I don’t see this theme changing anytime soon.

Large-cap stocks are the safest place to be at a time when the dollar is weak, corporate profits are booming and, yet, we have soaring domestic budget deficits and geopolitical issues in the Middle East.

For those looking for income investments, one way to capture a fat 9%-plus dividend yield and own the biggest U.S. multinationals is to own the Dow 30 Enhanced Premium & Income Fund (NYSE: DPO). It’s a closed-end fund that invests in all 30 of the stock components of the Dow Jones Industrial Average while applying aggressive swaps and covered call options strategy.

The Dow has easily been the most resilient of the major averages when the dark clouds of uncertainty lift, and I think you would be well-served to have a portion of your assets in the index — while simultaneously collecting some hefty dividend income and option premiums.

The chart of DPO below shows a very constructive breakout from a “golden cross” in October. This occurs when the 20-day (green) and 50-day (yellow) moving averages move up through the 200-day (black) moving average, signaling a new uptrend. Currently, the market is in a period of consolidation, thanks to the front page of the daily newspaper showing havoc in the global oil patch.

This close-end fund will purchase other securities or financial instruments, primarily swap contracts, designed to provide additional investment leverage to the return of the Dow stocks.

Managers of the DPO fund also will engage in certain option strategies, primarily consisting of writing (selling) covered call options on some of the Dow stocks. The options will be written on approximately 50% of the portfolio. As a result, the other 50% of the fund’s total holdings will not be hedged — and have the potential for full capital appreciation.

The current 9.4% yield on DPO is easily accomplished when the Dow index is incurring triple-digit swings on a weekly basis. It’s the very stuff option sellers live for to bring in premiums, and as a result, a greater percentage of the portfolio can be left open for pure upside.

At this juncture, I like the risk/reward ratio associated with the Dow Jones industrials, and recommend purchase of the DPO up to $11 per share.