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Quick note before we get into it today: Join me and my fellow Cabot analysts Mike Cintolo, Carl Delfeld and Tyler Laundon today at noon ET for a FREE special event in which we will discuss the state of the market, how to maximize profits in this bullish environment, reveal our top stocks to buy now, and answer any questions you may have. To join us, simply click here.
It’s a Great Time for Income
The title sounds counterintuitive. After all, the market has been terrific. And technology stocks, which rarely pay dividends, are leading the charge.
The S&P 500 has spent much of this year making new all-time highs. The index has rallied 27% since late October and 46% from the low in October of 2022. But most of those gains have been driven by the technology sector, which represents an outsized portion of the S&P. Returns for the rest of the market have been rather lame.
Many of the best income stocks have been notable laggards in this bull market so far. Investors have been drawn to fixed-rate investments instead as rates rose to multi-decade highs and those formerly sought-after investments became attractive again for the first time in forever. Dividend yields haven’t seemed so attractive of late.
But things change. They always do. Energy stocks had been dogs and then soared after the pandemic. Technology stocks were a disaster in 2022 but have reignited and led the market higher ever since. Beaten-down sectors don’t stay down forever. Investing wisely ahead of a sector rotation can turn a good stock into a great one.
Interest rates have likely peaked and are unlikely to forge higher going forward. Even if rates stay high for a while, they probably won’t go up anymore, at least to anywhere near the degree of the past few years. The greater likelihood is a downside move. A weaker economy will put downward pressure on rates, thus reversing the cause of recent income stock distress.
Meanwhile, many high-quality income stocks are selling at historically cheap valuations and high yields. It may be a booming rally for the overall market indexes. But it is still 2022 for many great income stocks. Even if these stocks don’t spring back right away, you’ll be well paid to wait.
Income investors can find the best valuations and the highest yields in many years in some of the very best dividend stocks. With interest rates at the highest level in decades, an opportunity is enabled by an aberration that won’t last. Buying great stocks cheap has always been a winning formula for investing success. That’s why it’s a great time for income.
With many great stocks to choose from under the current circumstances, I highlight one of the very best income stocks on the market in this issue. It pays dividends every single month, has a long and consistent track record of raising payouts, and has delivered fantastic total returns. The stock is also part of a lesser-known group of securities that is particularly timely right now.
What to Do Now
The rally forges on. After the strong finish to last year, the S&P is up about 10% already this year. The market just seems to consistently overcome worries and break new ground.
Last week was a great example. The rally had been sputtering as sticky inflation tempered expectations for lower interest rates this year. But the Fed confirmed that it still expects to make the expected three rate cuts this year at the March meeting last week. That worry is gone for now and the market rallied for the rest of the week.
It’s tricky to navigate a market like this. You don’t want to fight the tape when the market keeps going up. At the same time, you don’t want to buy too aggressively when the market could be at a near-term top. This newsletter has seized the opportunity to sell high-priced calls on stocks that have run to new highs while buying some of the less expensive income stocks that have not run up as much as the overall market.
It is a great time for income in terms of both covered calls and picking up new stocks with generous dividends that have been out of favor. There’s no reason to change that strategy at this point. Of course, if the market changes character, we can pivot to a different strategy.
Monthly Recap
February 27
Purchased Enterprise Product Partners L.P. (EPD) - $27.61
Purchased Brookfield Infrastructure Corporation (BIPC) - $22.64
March 5
Xcel Energy Inc. (XEL) - Rating change “BUY” to “HOLD”
March 12
Sold QCOM April 26 $170 calls at $10.00 or better
Sold WMB May 17 $35 calls at $2.00 or better
March 15
ABBV March 15 $160 calls at $7.00 – Expired
AbbVie Inc. (ABBV) stock – Called
March 26
Buy Main Street Capital Corporation (MAIN)
Featured Action: Buy Main Street Capital Corporation (MAIN)
Yield: 6.3%
Venture capital, or private equity, is money provided to young and growing businesses that are underserved by traditional lenders and otherwise wouldn’t have access to sufficient capital. This money is typically lent at very high rates of interest and/or in exchange for equity stakes, a percentage of ownership.
Venture capital used to be the exclusive domain of institutions and wealthy investors. But as financial markets have grown in sophistication, venture capital investing is no longer the exclusive domain of the wealthy. There is a little-known class of security that enables regular investors to mimic the very same moneymaking strategies employed by the rich and famous. These securities are called Business Development Companies (BDCs).
A BDC is a class of security that is traded on major exchanges in the United States. These publicly traded securities provide the same advantages of any stock. They have daily liquidity and can be purchased or sold at any time during market hours. But BDCs are not ordinary stocks.
Similar to real estate investment trusts and master limited partnerships, BDCs are tax-advantaged investments. Because of the economic desirability of fueling economic expansion, BDCs are granted special tax status. They pay no income tax at the corporate level provided that pay out 90% of net income in the form of dividends.
Accordingly, BDCs typically pay out a much higher level of income than ordinary corporations because money normally lost to taxes is available to fuel higher dividend payments.
Houston-based Main Street Capital Corporation is a BDC that provides high-interest loans and takes equity stakes in lower-middle-market companies and makes loans to middle-market companies. Main currently has over $7.2 billion of invested capital under management that is diversified through 190 companies in over 30 different industries throughout the United States.
The portfolio at fair value consists of lower-middle-market (53%), private loan debt investments (34%), middle-market debt investments (7%), and other portfolio investments (7%). The average rate received on overall debt is 12.7% with almost 100% of debt being first lien and the majority being senior secured.
There are a few things that make Main Street unique as a BDC. The main thing being the focus on lower-middle-market companies that are underserved not only by traditional lenders but also by other BDCs.
Middle-market companies have annual revenues in the range from $50 million to $1 billion. Lower-middle-market (LMM) companies are at the low end of that range, from $50 million to $150 million. The vast majority of BDCs focus on the larger end of the spectrum. These smaller companies offer far less competition and great opportunities for BDCs with the savvy and know-how to identify the best, most promising companies.
Main is well diversified in 80 different LMM companies. These companies were screened from a large universe of an estimated 190,000 plus such companies in the United States. Main’s average investment in these companies is $22.3 million at cost with the average company investment representing less than 1% of the overall portfolio.
The LMM debt portfolio is composed of 99% first-lien loans with 72% fixed rate and 28% floating rate with an average yield of 12.7% at cost. The other unique aspect of MAIN versus other BDCs is the equity stakes, which few BDCs have and none have them to the extent MAIN does. The equity positions provide dividends (currently an average rate of 6.4%), capital appreciation, and periodic capital gains.
Main currently has equity stakes in 28% of the LMM portfolio at cost with an average equity position representing 40% ownership in the company. The equity portfolio has had an overall average of 127% NAV per share growth since the MAIN 2007 IPO. The equity side has been a brilliant complement to the high-interest loan income, providing solid capital appreciation along with several supplemental dividends from realized gains when the stakes are sold. Another advantage is that this small company’s debt and equity tends to have a low correlation to the overall stock and bond markets.
The LMM is complemented by the Private Loan and Middle-Market portfolios. Private loans are general loans made to companies that don’t necessarily fit the LMM and MM categories. These loans are 95% secured and 100% first lien senior debt yields a current 12.9%. The MM market debt is 91% secured or rated and 99% first lien with an average yield of 12.5%.
How has this LMM market involvement along with high investment income and equity stakes borne out in stock performance?
Since the inception of the VanEck BDC Income ETF (BIZD), the largest BDC ETF on the market, in February 2013, it has returned 118%. MAIN has doubled the return over that period with 317%. MAIN has also tripled the S&P 500 returns since the 2007 IPO, returning 1,128% versus 347% for the S&P over the same period. It has slightly underperformed the S&P over the past 10- and 5-year periods but outperformed the index over the past three years.
Another unique and distinguishing aspect of the business is that it is internally managed. MAIN provides its own industry-leading expertise in matters of growth/expansion initiatives, buyouts/change of control, recapitalizations, and acquisitions. Most BDCs don’t, and pay out the wazoo for external help.
Main internally manages $5.5 billion of its $7.2 billion of invested assets. That provides a sizable cost advantage. Main’s operating expenses to assets ratio is just 1.3% compared to 2.9% for BDCs and 2.3% for commercial banks.
The Dividend
As a BDC, MAIN pays no taxes at the corporate level and is required to pay out the bulk of its earnings in the form of dividends. A beautiful aspect of this stock is that it pays these dividends every single month. That’s part of what makes MAIN a great income stock. The current regular monthly payout is $0.24 per share which translates to a 6.3% yield at the current price. But there’s more.
Because of realized gains generated by the sale of equity stakes, MAIN often pays out supplemental dividends in addition to the regular payouts, which it has done consistently for several years. In 2022, it paid out four supplemental dividends totaling another $0.36 per share. Last year, it also paid four supplemental dividends in the combined amount of $0.97 per share.
The extra dividends increased the payout from regular dividends of $2.79 per share to $3.76. That’s the difference between a yield at today’s price of 6.1% to a yield of 8.3% counting the supplements. There’s no guarantee that the supplements will continue this year. But there is a good chance.
Is the dividend secure? The company has low debt and a reasonable 74% payout ratio compared to an average of 85% among BDCs. But more impressive is the fact that since its 2007 IPO MAIN has never cut the monthly payout. That includes the periods of the financial crisis and the pandemic. The payout has also grown by an average of 10% per year for the last three years.
Although MAIN is currently selling near the 52-week high, it is still reasonably priced at less than 1.6 times book value and most other valuation measures are below the five-year average. That strong monthly income combined with an occasional covered call can potentially provide huge income.
Main Street Capital Corporation (MAIN)
Security type: Business Development Company (BDC)
Sector: Asset Management
Price: $46
52-week range: $37.70 - $46.63
Yield: 6.3%
Profile: Main Steet is a BDC that provides custom debt and equity financing to lower-middle-market companies as well as private loans and high interest loans to middle-market businesses.
Positives
- Lower middle market companies provide less competition and more upside.
- Equity stakes provide capital appreciation in the stock and often supplemental dividends.
- The stock has a strong track record, and the high monthly payout is secure.
Risks
- Small companies often have a hard time in recessions.
- Income stock performance tends to struggle during times of rising interest rates.
Portfolio Recap
| Open Recommendations | Ticker Symbol | Entry Date | Entry Price | Recent Price | Buy at or Under Price | Yield | Total Return |
| Alexandria Real Estate Eq. | ARE | 12/19/23 | $129.54 | $125.53 | $140.00 | 4.05% | -2.14% |
| American Tower Corp. | AMT | 1/23/24 | $202.26 | $192.79 | $220.00 | 3.36% | -4.68% |
| Brookfield Infrstr. Cp. | BIPC | 2/27/24 | $32.64 | $34.19 | $40.00 | 4.74% | 3.23% |
| Enterprise Product Ptnrs. | EPD | 2/27/24 | $27.61 | $28.86 | $30.00 | 6.95% | 4.53% |
| Main Street Capital Corp. | MAIN | 3/29/24 | $46.00 | $50.00 | 6.26% | ||
| Marathon Petroleum Corp. | MPC | 10/24/23 | $149.45 | $200.17 | $155.00 | 1.65% | 36.10% |
| NextEra Energy, Inc. | NEE | 4/25/23 | $77.50 | $61.78 | $65.00 | 3.33% | -18.14% |
| Qualcomm Inc. | QCOM | 5/5/21 | $134.65 | $170.10 | $165.00 | 1.88% | 34.94% |
| Realty Income Corp. | O | 6/27/23 | $60.19 | $52.08 | $62.00 | 5.92% | -9.73% |
| The Williams Companies | WMB | 8/24/22 | $35.58 | $38.25 | $38.00 | 4.97% | 18.23% |
| Xcel Energy Inc. | XEL | 8/22/23 | $57.95 | $52.27 | NA | 4.19% | -7.26% |
| Call Trades | |||||||
| Open Recommendations | Ticker Symbol | Initial Action | Entry Date | Entry Price | Recent Price | Sell To Price or better | Total Return |
| MPC Mar 28th $165 call | MPC240328C00165000 | Sell | 2/14/24 | $10.00 | $24.92 | $9.12 | 6.69% |
| QCOM Apr 26th $170 call | QCOM240426C00170000 | Sell | 3/12/24 | $10.00 | $7.06 | $10.00 | 7.43% |
| WMB May 17th $35 call | WMB240517C00035000 | Sell | 3/12/24 | $2.00 | $3.70 | $2.00 | 5.62% |
| as of close on 03/22/2024 | |||||||
| SOLD STOCKS | |||||||
| X | 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 | 15.08% |
| Qualcomm | QCOM | Called | 6/24/20 | $89.14 | 9/18/20 | $95 | 7.30% |
| U.S. Bancorp | USB | Called | 7/22/20 | $36.26 | 9/18/20 | $38 | 3.42% |
| Brookfield Infras. Ptnrs. | BIP | Called | 6/24/20 | $41.92 | 10/16/20 | $45 | 8.49% |
| Starbucks Corp. | SBUX | Called | 8/26/20 | $82.41 | 10/16/20 | $88 | 6.18% |
| Visa Corporation | V | Called | 9/22/20 | $200.56 | 11/20/20 | $200 | 0.00% |
| AbbVie Inc. | ABBV | Called | 6/2/20 | $91.04 | 12/31/20 | $100 | 12.43% |
| Enterprise Prod. Prtnrs. | EPD | Called | 6/24/20 | $18.14 | 1/15/21 | $20 | 15.16% |
| Altria Group | MO | Called | 6/2/20 | $39.66 | 1/15/21 | $40 | 7.31% |
| U.S. Bancorp | USB | Called | 11/25/20 | $44.68 | 1/15/21 | $45 | 1.66% |
| 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% |
| Chevron Corp. | CVX | Called | 12/23/20 | $85.69 | 4/1/21 | $96 | 12.95% |
| 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% |
| ONEOK, Inc. | OKE | Called | 5/26/21 | $52.51 | 2/18/22 | $60 | 19.62% |
| 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% |
| U.S Bancorp | USB | Sold | 3/24/21 | $53.47 | 4/13/22 | $51 | -1.59% |
| 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% |
| ONEOK, Inc. | OKE | Called | 5/25/22 | $65.14 | 1/20/23 | $65 | 2.66% |
| 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% |
| Brookfield Infrastructure Cp. | BIPC | Called | 11/9/22 | $42.43 | 7/21/23 | $45 | 8.72% |
| Star Bulk Carriers Corp. | SBLK | Sold | 6/1/22 | $33.30 | 8/8/23 | $18 | -31.38% |
| Visa Inc. | V | Called | 12/22/21 | $217.16 | 8/18/23 | $235 | 9.16% |
| Global Ship Lease, Inc. | GSL | Sold | 2/23/22 | $24.96 | 8/29/23 | $19 | -13.82% |
| ONEOK, Inc. | OKE | Called | 3/28/23 | $60.98 | 9/15/23 | $65 | 9.72% |
| Hess Corporation | HES | Called | 6/6/23 | $132.25 | 10/20/23 | $155 | 17.87% |
| Tractor Supply Company | TSCO | Sold | 9/26/23 | $203.03 | 11/28/23 | $200 | -1.02% |
| Digital Realty Trust | DLR | Called | 7/18/23 | $117.31 | 1/19/24 | $135 | 17.16% |
| Intel Corporation | INTC | Called | 7/27/22 | $40.18 | 1/19/24 | $43 | 9.76% |
| AbbVie Inc. | ABBV | Called | 7/25/23 | $141.63 | 3/15/24 | $160 | 15.11% |
| EXPIRED OPTIONS | |||||||
| 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 | 9/1/21 | $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 | $10.50 | 4.82% | |
| BIPC $45 July 21st call | in-the-money | 5/23/23 | $3.25 | 7/21/23 | $3.25 | 7.66% | |
| V $235 Aug 18th call | in-the-money | 7/11/23 | $9.00 | 8/18/23 | $9.00 | 4.13% | |
| GSL $20 Aug 18th call | out-of-money | 7/11/23 | $1.25 | 8/18/23 | $1.25 | 5.00% | |
| OKE $65 Sep 15 call | in-the-money | 9/15/23 | $3.20 | 7/25/23 | $3.20 | 4.92% | |
| INTC $35 Oct 20th call | out-of-money | 9/8/23 | $3.78 | 10/20/23 | $3.78 | 9.41% | |
| HES $155 Oct 20th call | in-the-money | 9/8/23 | $9.00 | 10/20/23 | $9.00 | 6.81% | |
| DLR $135 Jan 19th call | in-the-money | 11/22/23 | $6.00 | 1/19/24 | $6.00 | 5.11% | |
| INTC $42.50 Jan 19th call | in-the-money | 11/29/23 | $3.50 | 1/19/24 | $3.50 | 8.71% | |
| ABBV $160 Mar 15th call | in-the-money | 1/10/24 | $7.00 | 3/15/24 | $7.00 | 4.94% | |
Alexandria Real Estate Equities, Inc. (ARE)
Yield: 4.0%
This one-of-a-kind life science property REIT cooled off early this year after a big surge in November and December as the interest rate trade reversed. But ARE has been trending higher since the middle of February and has already made up most of the early-year losses. It is likely that interest rates have peaked and will trend lower throughout the year or at least just stay where they are. But that’s mostly just short-term noise. ARE is a great income stock selling at the low end of historical valuations while the company is consistently growing revenues and profits from its niche properties. I’m expecting a good year for ARE and a solid income. BUY
Alexandria Real Estate Equities, Inc. (ARE)
Next ex-div date: March 27, 2024
American Tower Corporation (AMT)
Yield: 3.4%
AMT had mimicked the price moves of ARE until recently. Unlike ARE, AMT has been turning south for a couple of weeks. The reason is because the company cut the dividend by 4.7% in order to focus on debt reduction. It sounds worse than it is. It just lowered the dividend to the third-quarter level, which was the third quarterly increase of 2023. It’s dumb to negate the fourth-quarter increase, but the current dividend is still higher on a year-over-year basis. But this is one of the best REITs on the market that deals in very high-quality properties. The cell tower properties will only grow in demand in the years ahead and in a more friendly interest rate environment, AMT will sell at a much higher price. AMT will most certainly shine again. In the meantime, it pays you to wait. BUY
American Tower Corporation (AMT)
Next ex-div date: April 11, 2024
Brookfield Infrastructure Corp. (BIPC)
Yield: 4.7%
It’s been an uncharacteristically bad two years for Brookfield. The inflationary and rising interest rate environment beat up the utility sector and BIPC wasn’t spared. But it is unlikely that rates will continue to move higher. There has also been encouraging behavior recently. BIPC soared along with many other dividend stocks in the last two months of last year but, unlike many similar stocks, it didn’t pull back this year. It just kind of went sideways instead. Brookfield has some of the most defensive revenues possible. It’s also been expanding into cell towers, data centers and foundries. Meanwhile, Brookfield continues to deliver strong operational results. BUY
Brookfield Infrastructure Corporation (BIPC)
Next ex-div date: May 28, 2024, est.
Enterprise Product Partners L.P. (EPD)
Yield: 6.9%
The midstream energy partnership just hit a new 52-week high. These are good times for midstream energy stocks. Oil and gas demand remains strong while the high dividends separate them from the more interest rate-sensitive, lower-yielding stocks. EPD is already up over 10% YTD. Looking forward, the company should deliver solid growth this year with anticipated steady hydrocarbons demand and recent acquisitions coming online. EPD has produced solid and steady returns in different market environments with a 17.45% return in 2023 after a strong bear market return of 15% for 2022. That massive distribution is extremely well supported, and the stock is still well below the all-time high despite much higher earnings. (This security generates a K-1 form at tax time.) BUY
Enterprise Product Partners L.P. (EPD)
Next ex-div date: April 30, 2024, est.
Marathon Petroleum Corp, (MPC)
Yield: 1.6%
This superstar refiner is on fire and keeps hitting new all-time highs. The energy sector has gotten hot and has been the second-best performing market sector of the past month as demand for refined products remains strong and oil prices are rising. MPC is up 32% YTD and 16% in March alone. The stock tends to post good performance even when the energy sector struggles. But with the tailwind of a strong sector, the performance is huge. Despite a decline from last year’s record revenues, earnings and revenues remain very strong by historical standards. The company is flush with cash from the boom times while robust profits continue to roll in. We’ll see if the rally has more to go. BUY
Marathon Petroleum Corporation (MPC)
Next ex-div date: May 20, 2024, est.
NextEra Energy, Inc. (NEE)
Yield: 3.3%
NEE has been moving higher this month. After moving with the ebb and flow of other defensive dividend stocks late last year and early this year, it has moved back to the high before this year’s earlier selloff. It had been a superstar performer before inflation and rising interest rates. It provides both safety from its best-in-class regulated utility business and growth from its considerable clean energy business. The utility reported strong earnings that exceeded expectations again last month and reiterated its growth projections for this year, near the top of the estimated range. The interest rate-related weakness should at least diminish going forward as rates have likely peaked. BUY
NextEra Energy, Inc. (NEE)
Next ex-div date: May 26, 2024, est.
Qualcomm Corp. (QCOM)
Yield: 1.9%
Qualcomm is secretly one of the best semiconductor and AI stocks to own. It had been held back by cyclicality, both in semiconductors and smartphones. But the negative cycle is ending, and AI is coming to mobile devices. QCOM cooled off last week after a huge rally in which it had risen 22% YTD and 65% since late October. It looks like the mobile device chip maker will simply bounce around with the technology sector in the near term. A breather would probably be a healthy thing for the stock. But the rest of the year looks strong as Qualcomm is also introducing new AI chips for PCs and smartphones that could be big sellers this year. BUY
Qualcomm Inc. (QCOM)
Next ex-div date: May 28, 2024, est.
Realty Income Corp. (O)
Yield: 5.9%
This beleaguered but legendary monthly income stock has failed to rally over the past month, as many of its peers have. O can’t seem to escape the high interest rate negativity. While it can’t buck the trend, it should react quite well if interest rates trend lower over the course of this year, which is a scenario with a strong possibility. The historically strong performer is dirt cheap ahead of an environment that will likely at least stop getting worse in terms of interest rates. It’s probably the very late innings for rising and high interest rates and O is well positioned ahead of a likely shift in the future. It is still a great stock at a cheap price with retail staple properties and solid growth likely ahead. BUY
Realty Income Corporation (O)
Next ex-div date: March 28, 2024
The Williams Companies, Inc. (WMB)
Yield: 5.0%
It’s a new high. After going sideways for many months, WMB has broken out since the middle of February. As I mentioned above, energy stocks are hot and midstream companies are mostly selling near multi-year highs. It’s a stable high-yield stock and the company should deliver solid and dependable earnings in just about any economy. Business remains solid and not dependent on commodity prices. It pays a well-supported dividend, and recent acquisitions and expansions ensure more solid growth going forward all the way out to 2028. The recent strong performance has enabled the selling of a call on the position which will generate a high income. BUY
The Williams Companies, Inc. (WMB)
Next ex-div date: June 6, 2024, est.
Xcel Energy Inc. (XEL)
Yield: 4.2%
The alternative energy utility had a terrible week earlier in the month. The stock crashed 14% after it was reported that Xcel could be held liable for damages for the raging Texas wildfire, which is the worst in the state’s history and encompasses a land mass larger than the state of Rhode Island. Several utilities have been held liable for wildfires in recent years. Xcel has admitted that its equipment was likely involved in igniting the blaze. This weird development is also ongoing, and the scope of the damage is not known. NEE was downgraded to a HOLD until there is more clarity on the matter. The stock has bounced higher since the initial decline and has held steady. HOLD
Xcel Energy Inc. (XEL)
Next ex-div date: June 14, 2024, est.
Existing Call Trades
Sell MPC March 28 $165 calls at $10.00 or better
This sizzling hot refiner stock ran away as the energy sector caught fire. Demand for refined product is strong in the solid economy and oil prices have been on the rise. MPC has consistently outperformed its peers. But the stock hit a new high in a still uncertain economy. In the good refining environment, MPC really took off in March and is up 16% for the month so far and more than $35 per share above the strike price. It is highly likely to be called in three days but has provided a great income and total return in a short holding period for the stock.
Sell QCOM April 26 $170 calls at $10.00 or better
These calls hit the target price on the same day the “Trade Alert” was released but the stock has pulled back since. The calls are currently priced well below the strike price. But QCOM can move fast. If the tech sector has a good day or two you should be able to get the $10 call premium price or better if you haven’t already.
Sell WMB May 17 $35 calls at $2.00 or better
The calls have sold above the target price since they were targeted. In fact, if you sold these calls, you almost certainly got more than the targeted $2 per call. Energy stocks have been riding high and the midstream companies are almost all near the 52-week highs. It’s a great time to cash in on the recent bounty and secure a high income and possible high total return.
Income Calendar
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 April 23, 2024.
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