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A Great Monthly Dividend Stock Goes on Sale
The market has been surprisingly impressive this year. The S&P 500 is up over 13%, right around the midpoint. The index is also up over 24% from the October low, which officially constitutes a new bull market.
Stocks have climbed a wall of worries including inflation, the Fed, and a possible looming recession. Investors see the market getting past this rate hiking cycle with perhaps no recession or little pain. They might be right. Then the market got a further boost with artificial intelligence (AI).
But precious few stocks have participated in the YTD rally. As of earlier this month, just ten large-cap technology stocks accounted for just about all the market gains this year. The other 490 stocks on the S&P 500 collectively went nowhere. Without the technology boom, the market would be lower YTD.
It’s a precarious situation. The same handful of stocks can’t pull the market higher alone for that much longer. Either this rally broadens out or it peters out.
Either scenario should bode well for defensive stocks.
The market has overwhelmingly favored growth stocks and has not been kind to defense stocks in the first half of the year. Utilities, Health Care, Consumer Staples, and Energy have been the worst-performing market sectors this year. But that situation is unlikely to persist.
There is still lots of risk. Inflation could be stickier, and the Fed could be more hawkish than currently anticipated. Most economists are still predicting a recession later this year or early next year. Even if a recession never happens, it’s reasonable to expect that the economy will slow in the second half of the year. And overall market earnings have already contracted for the last two quarters.
The relative performance of defensive stocks historically thrives in a slowing economy. If the rally broadens in such an environment, it will need participation from the defensive sectors. If the market pulls back, defense should be the best place to be.
This is just a snapshot in time. Things might look a whole lot different by the end of the year. In the meantime, many solid, dividend-paying stocks are undervalued ahead of a period of likely relative outperformance.
What to Do Now
The portfolio did get in on some of the AI fun. Although AI stocks have already begun to pull back over the past couple of weeks, Qualcomm (QCOM) is still up about 4% for the past month and Intel (INTC) is up 14%. The rally also did broaden out somewhat in June as Williams Companies (WMB), ONEOK (OKE), and NextEra Energy (NEE) all have positive returns over the last month.
The rally has been interrupted as last week was the first down week for the market in over a month. There could certainly be a further pullback in the weeks ahead after stocks have had such a strong run. But even if this rally manages to continue, there are unlikely to be similar gains in the second half of the year as in the first half.
Dividend stocks should be at a premium in a flatter market. And the more defensive stocks with resilient earnings should perform relatively well as the economy slows down, or if there is a recession. For that reason, the current BUY-rated stocks are WMB, Brookfield Infrastructure Corp (BIPC), NEE, and Hess Corporation (HES).
As an addition, I highlight a new BUY-recommended stock in the issue. It is a legendary income stock that makes its payouts on a monthly basis. It’s also near the lowest price level of the past two years.
V June 2nd $230 calls at $10.50 - Expired
Purchased Hess Corporation (HES) - $132.25
Buy Realty Income Corporation (O)
Featured Action: Buy Realty Income (O)
Realty Income is one of the highest-quality and best-run REITS on the market. Cash flow from a conservative portfolio of over 12,400 properties has enabled the company to amass a phenomenal track record of paying monthly dividends; to such an extent that Realty Income has the audacity to refer to itself as “The Monthly Dividend Company.” It is a Dividend Aristocrat with more than 25 consecutive years of dividend growth.
Realty is the world’s fourth-largest REIT that has operated for over 51 years and currently has over 12,000 properties rented to 1,125 tenants in all 50 states, Puerto Rico and the United Kingdom. Since its 1994 IPO, Realty Income has amassed a record of one of the most successful income investments on the market.
Here are a few things to like about it.
- 14.6% average annual total return since 1994
- 634 consecutive monthly dividends
- 102 consecutive quarterly dividend increases
- 29 consecutive years of rising dividends
- 4.4% annual dividend growth since 1994
- Sky high credit ratings
How do they do it?
The company buys established properties with a proven record of profitability and rents them to high-quality tenants. The business model is to generally use a “sale-leaseback” arrangement whereby Realty Income purchases the property from the tenant and then the company remains there and pays rent under long-term leases of 10 to 20 years.
Most of these leases are also “net leases,” meaning the lessees pay all the costs associated with the property including maintenance, insurance, and taxes. This arrangement frees Realty Income from unpredictable expenses, and the REIT just receives regular rent payments with built-in increases over time.
Although Realty Income is a retail REIT, it is far less volatile than most because of the diversification and remarkably stable clients that offer essential services that are recession-resistant. Its largest clients include Walgreens, 7-eleven, Dollar General, FedEx, Walmart and CVS. Tenants have a historic median 98.2% occupancy rate.
Defensive dividend-paying stocks have underperformed in the first half of this year. Both the REIT and consumer staples sectors have returned significantly less than the market index. Yet, there is an earnings recession. The economy is slowing, even if there is no recession in the next several quarters. The relative performance of defensive, dividend-paying stocks and sectors tends to thrive in such environments.
For long-term investors, there is probably no bad time to buy the stock. But there are better times. And this is one of them. O currently sells well below the pre-pandemic high despite the fact that the company continued to grow earnings through the pandemic. O is also near the lowest price in the past two years.
It’s a stock that has averaged a better than 14% annual return since its IPO in 1994. But the returns are much higher if the stock was scooped up during the low periods. It also provides a monthly income as you wait for the stock to regain traction as a high-yielding defensive play in an uncertain market.
O pays a stellar 5.2% yield that should remain attractive, especially considering the monthly payout. Realty also made a large acquisition recently that should ensure solid earnings growth over the next two quarters at least.
Because of the fact that most tenants are staples that remain strong during a recession, earnings should remain solid, as they did through the pandemic. O is a great way to pick up one of the very best income stocks on the market at a cheap price ahead of a period of historic relative outperformance.
|Open Recommendations||Ticker Symbol||Entry Date||Entry Price||Recent Price||Buy at or Under Price||Yield||Total Return|
|Global Ship Lease, Inc.||GSL||2/23/22||$24.96||$18.81||NA||7.94%||-16.80%|
|Star Buld Carriers Corp.||SBLK||6/1/22||$33.30||$18.03||NA||21.07%||-32.30%|
|The Williams Companies||WMB||8/24/22||$35.58||$30.59||$38.00||5.85%||-9.07%|
|Brookfield Infrastructure Cp.||BIPC||11/9/22||$42.43||$45.15||$46.00||3.39%||9.07%|
|NextEra Energy, Inc.||NEE||4/25/23||$77.50||$74.17||$85.00||2.52%||-4.09%|
|Realty Income Corp.||O||6/27/23||$58.76||$62.00||5.22%|
|EXISTING CALL TRADES|
|Open Recommendations||Ticker Symbol||Initial Action||Entry Date||Entry Price||Recent Price||Sell To Price or better||Total Return|
|BIPC $45 July 21st call||BIPC230721C00045000||Sell||5/23/23||$3.25||$2.20||$3.25||7.66%|
|as of close on 6/23/2023|
|Security||Ticker Symbol||Action||Entry Date||Entry Price||Sale Date||Sale Price||Total Return|
|Innovative Industrial Props.||IIPR||Called||6/2/20||$87.82||9/18/20||$100.00||15.08%|
|Brookfield Infras. Ptnrs.||BIP||Called||6/24/20||$41.92||10/16/20||$45||8.49%|
|Enterprise Prod. Prtnrs.||EPD||Called||6/24/20||$18.14||1/15/21||$20||15.16%|
|B&G Foods Inc,||BGS||Called||10/28/20||$26.79||2/19/21||$28||4.42%|
|Valero Energy Inc.||VLO||Called||8/26/20||$53.70||3/26/21||$60||11.73%|
|KKR & Co.||KKR||Called||3/24/21||$47.98||6/18/21||$55||14.92%|
|Digital Realty Trust||DLR||Called||1/27/21||$149.17||7/16/21||$155||5.50%|
|NextEra Energy, Inc.||NEE||Called||2/24/21||$73.76||9/17/21||$80||10.00%|
|Brookfield Infras. Ptnrs.||BIP||Called||1/13/21||$50.63||10/15/21||$55||11.65%|
|AGNC Investment Corp||AGNC||Sold||1/13/21||$15.52||1/19/22||$15||5.92%|
|KKR & Co.||KKR||Sold||8/25/21||$64.52||2/23/22||$58||-9.73%|
|Valero Energy Inc.||VLO||Called||11/17/21||$73.45||2/25/22||$83||15.53%|
|Enterprise Product Ptnrs||EPD||Called||3/17/21||$23.21||4/14/22||$24||11.25%|
|FS KKR Capital Corp.||FSK||Called||10/27/21||$22.01||4/14/22||$23||13.58%|
|Xcel Energy Inc.||XEL||Called||10/12/21||$63.00||5/20/22||$70||12.66%|
|Innovative Industrial Props.||IIPR||Sold||3/23/22||$196.31||7/20/22||$93||-51.23%|
|One Liberty Properties||OLP||Sold||7/28/21||$30.37||8/24/22||$25||-12.94%|
|Xcel Energy, Inc.||XEL||Called||10/26/22||$62.57||1/20/23||$65||4.67%|
|Realty Income Corp.||O||Called||9/28/22||$60.37||2/17/23||$63||5.41%|
|Medical Properties Trust||MPW||Sold||1/24/23||$13.22||3/21/23||$8||-38.00%|
|Security||In/out money||Sell Date||Sell Price||Exp. Date||$ Return||Total % Return|
|IIPR Jul 17 $95 call||out-of money||6/3/20||$3.00||7/17/20||$3.00||3.40%|
|MO Jul 31 $42 call||out-of-money||6/17/20||$1.60||7/31/20||$1.60||4.03%|
|ABBV Sep 18 $100 call||out-of-money||7/15/20||$4.60||9/18/20||$4.60||5.05%|
|IIPR Sep 18 $100 call||in-the-money||7/22/20||$5.00||9/18/20||$5.00||5.69%|
|QCOM Sep 18 $95 call||in-the-money||6/24/20||$4.30||9/18/20||$4.30||4.82%|
|USB Sep 18 $37.50 call||in-the-money||7/22/20||$2.00||9/18/20||$2.00||5.52%|
|BIP Oct 16 $45 call||in-the-money||9/2/20||$1.95||10/16/20||$1.95||4.65%|
|SBUX Oct 16 $87.50 call||in-the-money||10/16/20||$3.30||10/16/20||$3.30||4.00%|
|V Nov 20 $200 call||in-the-money||9/22/20||$10.00||11/20/20||$10.00||4.99%|
|ABBV Dec 31 $100 call||in-the-money||11/18/20||$3.30||12/31/20||$3.30||3.62%|
|EPD Jan 15 $20 call||in-the-money||11/23/20||$0.80||1/15/21||$0.80||4.41%|
|MO Jan 15 $40 call||in-the-money||11/25/20||$1.90||1/15/21||$1.90||4.79%|
|USB Jan 15 $45 call||in-the-money||11/25/20||$2.00||1/15/21||$2.00||4.48%|
|BGS Feb 19 $27.50 call||in-the-money||12/11/20||$2.40||2/19/21||$2.40||8.96%|
|VLO Mar 26 $60 call||in-the-money||2/10/21||$6.50||3/26/21||$6.50||12.10%|
|CVX Apr 1 $95.50 call||in-the-money||2/19/21||$4.30||4/1/21||$4.30||5.02%|
|AGNC Jun 18 $17 call||out-of-money||4/13/21||$0.50||6/18/21||$0.50||3.21%|
|KKR Jun 18 $55 call||in-the-money||4/28/21||$3.00||6/18/21||$3.00||6.25%|
|USB Jun 16 $57.50 call||out-of-money||4/28/21||$2.80||6/18/21||$2.80||5.24%|
|DLR Jul 16 $155 call||in-the-money||6/16/21||$8.00||7/16/21||$8.00||5.36%|
|AGNC Aug 20 $17 call||out-of-money||6/23/21||$0.50||8/20/21||$0.50||3.00%|
|OKE Aug 20 $57.50 call||out-of-money||6/23/21||$3.50||8/20/21||$3.50||6.67%|
|NEE Sep 17 $80 call||in-the-money||8/11/21||$3.50||9/17/21||$3.50||4.75%|
|BIP Oct 15 $55 call||in-the-money||9/01/2021||$2.00||10/15/21||$2.00||3.95%|
|USB Nov 19 $60 call||out-of-money||9/24/21||$2.30||11/19/21||$2.30||4.30%|
|OKE Nov 26 $65 call||out-of-money||10/20/21||$2.25||11/26/21||$2.25||4.28%|
|KKR Dec 17 $75 call||out-of-money||10/26/21||$3.50||12/17/21||$3.50||5.42%|
|QCOM Jan 21 $185 Call||out-of-money||11/30/21||$9.65||1/21/22||$9.65||7.17%|
|OLP Feb 18 $35 Call||out-of-money||11/19/21||$1.50||2/18/22||$1.50||4.94%|
|OKE Feb 18 $60 Call||in-the-money||1/5/22||$2.75||2/18/22||$2.75||5.24%|
|USB Feb 25 $61 call||out-of-money||1/13/22||$2.50||2/25/22||$2.50||4.68%|
|VLO Feb 25 $83 call||in-the-money||1/18/22||$4.20||2/25/22||$4.20||6.13%|
|EPD Apr 14th $24 call||in-the-money||3/2/22||$1.25||4/14/22||$1.25||5.69%|
|FSK Apr 14th $22.50 call||in-the-money||3/10/22||$0.90||4/14/22||$0.90||4.09%|
|XEL May 20th $70 call||in-the-money||3/30/22||$3.00||5/20/22||$3.00||4.76%|
|SBLK July 15th $134 call||out-of-money||6/1/22||$1.60||7/15/22||$1.60||4.80%|
|OKE Oct 21st $65 call||out-of-money||8/24/22||$3.40||10/21/22||$3.40||5.22%|
|OKE Jan 20th $65 call||In-the-money||11/25/22||$3.70||1/20/23||$3.70||5.68%|
|XEL Jan 20th $65 call||in-the-money||11/25/22||$5.00||1/20/23||$5.00||7.99%|
|O Feb 17th $62.50 call||in-the-money||12/28/22||$3.00||2/17/23||$3.00||4.97%|
|QCOM Sep 16th $145 call||out-of-money||7/20/22||$11.75||9/16/22||11.75||8.73%|
|V Mar 17th $220 call||out-of-money||1/24/23||$12.00||3/17/23||$12.00||5.51%|
|OKE May 19th $65 call||out-of-money||4/11/23||$2.70||5/19/23||$2.70||4.43%|
|V Jun 2 $230 call||out-of-money||4/21/23||$10.50||6/2/23||10.5||4.82%|
Brookfield Infrastructure Corporation (BIPC)
The infrastructure company stock has pulled back from the recent high and is down in June. But BIPC is still around the higher levels of the recent range. The stock got new life after a sluggish period because Brookfield reported a solid earnings quarter with funds from operations (FFOs) per share growth of 12.5% over last year’s quarter. The stock had been suffering from the lull in defensive stocks, but it shouldn’t stay down for long. A pullback from the recent spike higher is typical for this stock. BIPC is still strong with a good dividend ahead of a promising second half of the year. HOLD
Brookfield Infrastructure Corporation (BIPC)
Next ex-div date: August 30, 2023. Est.
Global Ship Lease, Inc. (GSL)
It’s been a tough market for this container shipping company stock since the stock peaked early last year. But it has bounced off the bottom and operational performance is still solid. Last quarter Global grew normalized earnings per share by 14.6% while continuing to expand its fleet of ships. The longer-term supply/demand dynamic is excellent and bodes well for the future. The near-term recovery in the stock was interrupted because the Chinese recovery hasn’t materialized. But it’s off the low and up sharply in June. HOLD
Global Ship Lease, inc. (GSL)
Next ex-div date: August 23, 2023, est.
Hess Corporation (HES)
HES keeps bouncing around in the near term on positive and negative news about energy prices. The more resilient economy is a plus, and there are a plethora of factors likely to put upward pressure on prices in the intermediate term. The longer-term supply/demand dynamic favors energy very much and Hess is a special case. It can increase production almost at will with very low-cost production. It should be stellar if energy stocks move higher again. But the stock is also uniquely equipped to deal with short-term turbulence in the industry. BUY
Hess Corporation (HES)
Next ex-div date: September 14, 2023, est.
Intel Corp, (INTC)
INTC pulled back sharply last week after soaring in the earlier part of June. The stock had surged over 30% in just a couple of weeks after Nvidia (NVDA) rocked the market with blowout earnings mostly from excitement regarding its expanding chip production capabilities. The Nvidia CEO expressed interest in partnering and the company is continuing to ink new deals around the world. INTC is still at the highest level since last summer and may be starting to be increasingly seen as a cheap stock with a bright future. HOLD
Intel Corporation (INTC)
Next ex-div date: August 4, 2023, est.
NextEra Energy, Inc. (NEE)
This combination regulated and clean energy utility stock has bounced around all over the place for the past two years and is currently at the lower end of that range. NEE is still well below the recent high. Defensive stocks have floundered. But that might not last. This company is targeting earnings per share growth of 6% to 8% annually through 2026 and 10% per year dividend growth through at least 2024. NEE has bounced off the low in the last month and hopefully can generate some momentum as the growth rally peters out. BUY
NextEra Energy, Inc. (NEE)
Next ex-div date: August 27, 2023, est.
ONEOK, Inc. (OKE)
OKE has had a tumultuous six weeks since the market hated its purchase of Magellan Midstream Partners (MMP). The deal will turn ONEOK from a natural gas operator to a diversified midstream company that services oil and refined products as well. The deal is a longer-term positive that could hurt performance in the near term. OKE did have a strong move off the recent bottom earlier this month, but it’s been floundering again over the last two weeks. OKE should still hold up relatively well because it has a high and safe dividend and reliable earnings in an environment where overall market earnings are contracting. HOLD
ONEOK Inc. (OKE)
Next ex-div date: July 28, 2023, est.
Qualcomm Corp. (QCOM)
Like INTC, QCOM has pulled back in the last couple of weeks after its initial AI surge. It’s bouncing around as investors fluctuate between confidence in the company’s future and waning AI excitement. Qualcomm describes itself as the “on-device AI leader,” and the company should benefit mightily from the increasing shift towards AI, and profits are now likely to soar sooner than previously expected. But Qualcomm doesn’t benefit as directly and immediately from AI as some other companies, and it is still vulnerable to lower handset sales in the near term. HOLD
Qualcomm Inc. (QCOM)
Next ex-div date: August 31, 2023, Est.
Star Bulk Carriers Corp. (SBLK)
The dry bulk shipping company had rallied earlier this year as shipping rates recovered somewhat. But the stock has pulled back to about even YTD as the Chinese recovery hasn’t delivered the desired effect on shipping rates. Unlike GSL, Star Bulk hasn’t massively increased its fleet size and year-over-year comparisons are tough as shipping rates have fallen. Although it is likely still the early innings of a multiyear positive cycle for shipping, the stock recently moved near the low. HOLD
Star Bulk Carriers Corp. (SBLK)
Next ex-div date: September 6, 2023, est.
Visa Inc. (V)
V sprung to a higher range after last year and has stayed near the high point ever since. The recent calls matured with the stock just shy of the 130 per share strike price. V never really pulled back after the surge. It just kind of leveled off and has shown resilience near this high point of the recent range. The payments processing company once again exceeded expectations on earnings. The stock should benefit from the decreasing likelihood of a near-term recession and can really take off as the market recovers. HOLD
Visa Inc. (V)
Next ex-div date: August 9, 2023, est.
The Williams Companies, Inc. (WMB)
This year has not been kind to defensive stocks or energy stocks so far. Natural gas prices have fallen largely because of the unusually warm winter temperatures throughout the country and the world. But it isn’t affecting the bottom line. Williams once again delivered on earnings and beat expectations for the fourth straight quarter. Earnings per share grew a whopping 36% over last year’s quarter as natural gas volumes remained strong and growing. WMB has pulled back from the early June spike but has since been clawing slowly higher. BUY
The Williams Companies, Inc. (WMB)
Next ex-div date: September 9, 2023, est.
Existing Call Trades
Sell BIPC July 21st $45 calls at $3.25 or better
After a big spike higher. BIPC is indeed pulling back as suspected. The portfolio sold well-in-the-money calls when the stock was riding high. But it has pulled back to within pennies of the strike price. There are still several weeks to go before expiration. We’ll see what happens. But we will secure a great income no matter what.
Ex-Dividend Dates are in RED and italics. Dividend Payments Dates are in GREEN. Confirmed dates are in bold, all other dates are estimated. See the Guide to Cabot Income Advisor for an explanation of how dates are estimated.
The next Cabot Income Advisor issue will be published on July 25, 2023.