Markets go up and down. Economies boom and bust. Investors get scared and they get greedy. But one of the few constants in an ever-changing investment landscape is the need for income. And investor demand for income is growing as the fastest growing segment of the population is 65 and older and retired.
The demand for the very best income stocks should remain strong. Also, during sideways and down markets, dividends account for most of the total market return. In problematic decades, dividends have almost completely offset market price declines.
It’s true that dividend stocks can still fall in a down market. But the long-term trend for the market is higher. History clearly shows that bear markets are the best time to get in cheap ahead of the next bull market. Meanwhile, dividends provide an income and less volatility while you wait.
In this issue, I highlight one of the very best income stocks on the market. It has a track record of paying dividends that is second to none and actually refers to itself as “The Monthly Dividend Company.” It currently sells at the 52-week low with a 5% yield. Earnings are resilient during a recession, and it is well insulated from inflation.
A Legendary Income Stock Goes on Sale
Markets go up and down. Economies boom and bust. Investors get scared and they get greedy. But one of the few constants in an ever-changing investment landscape is the need for income.
Bills come due every month regardless of what the market is doing. It doesn’t matter if it’s a raging bull market or a bear market that’s getting worse. You still need that income. And investor demand for income is growing as the fastest growing segment of the population is 65 and older and retired.
The very best income stocks fulfill a large and growing need and should perform well over time. It’s also true that the relative performance of dividend stocks skyrockets in markets like this. So far this year, the S&P 500 index is down over 23%. But the iShares Select Dividend ETF (DVY), which represents just the dividend-paying stocks of that same index, is down less than 10%.
Since 1930 dividends have accounted for 40% of total market returns. And dividend stocks have done so with much less volatility than the overall market. But that’s just the overall average. During sideways and down markets, dividends account for most of the total market return. In problematic decades, dividends have almost completely offset market price declines.
It’s true that dividend stocks can still fall in a down market. But the long-term trend for the market is higher. History clearly shows that bear markets are the best time to get in cheap ahead of the next bull market. Meanwhile, dividends provide an income and less volatility while you wait.
Things may continue to worsen in the market before they get better. It’s probably too early to start buying the more aggressive stocks. But it may not be a bad time to start nibbling at the very best income stocks selling at historically high yields.
In this issue, I highlight one of the very best income stocks on the market. It has a track record of paying dividends that is second to none and actually refers to itself as “The Monthly Dividend Company.” It currently sells at the 52-week low with a 5% yield. Earnings are resilient during a recession, and it is well insulated from inflation.
What to Do Now
This isn’t pretty. It’s been a terrible year and things are getting worse. The S&P 500 has given up all the gains from the summer rally and closed at a new 52-week low on Monday.
The latest round of gloom is over the Fed’s recent statements indicating that it is prepared to drag the economy further into recession to tame inflation. Investors increasingly see a hard landing from the continuing Fed rate hikes as inevitable.
It’s been a bear market for a while. The summer proved to be just a bear market rally and the market is making new lows. The market may continue to get worse before it gets better. It’s a dangerous crossroads for the market at this level. For that reason, it is probably too early to buy the more volatile stocks.
The only portfolio stocks currently rated “BUY” are the midstream energy companies, ONEOK (OKE) and The Williams Companies (WMB). The stocks got creamed over the past couple of weeks, along with just about everything else. But these companies should fare well after the panic selling when the market stabilizes.
The midstream businesses should endure a recession very well, as demand for natural gas will likely persist. The stocks also pay a huge income yield and are reasonably valued. The recent selloff presents a buying opportunity in both those stocks.
Call premiums also dry up in a down market like this. A better time for covered calls is when the market moves higher, and more people are willing to speculate on higher prices going forward. We did this with recent calls on Qualcomm (QCOM) and ONEOK (OKE). Although the stocks have moved lower since the calls were sold, we generated a strong income and the intermediate prognosis for the stock prices remains good.
While the near term looks bleak, opportunities are emerging for longer-term investors. Historically, results have been very good for investors that buy stocks after the market hits bear territory. There will be great opportunities at some point. But not yet.
Monthly Recap
August 30th
Star Bulk Carriers Corp. (SBLK) – Rating change “HOLD” to “SELL 1/2"Qualcomm Corp. (QCOM) – Rating change “BUY” to “HOLD”
September 16th
QCOM Sep 16th $145 calls at $11.75 – Expired
September 28th
Buy Realty Income (O)
Featured Action: Buy Realty Income (O)
Yield: 5%Realty Income is one of the highest-quality and best-run REITs on the market. Cash flow from a conservative portfolio of over 11,000 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, has operated for over 51 years and currently has 11,427 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 as one of the most successful income investments on the market.
Here are a few things to like about it.
- 25% average annual total return since 1995
- 626 consecutive monthly dividends
- 99 consecutive quarterly dividend increases
- 117 monthly dividend hikes
- 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.
Great Timing
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. The stock is currently selling at a 52-week low because of the recent indiscriminate market selloff. O currently sells 25% below the pre-pandemic high despite the fact that the company continued to grow earnings through the pandemic.
It’s a stock that has averaged a better than 14% 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 regain traction as a high-yielding defensive play in an uncertain market.
It’s true that high interest rates can negatively affect REITs as competing fixed-rate investments become more attractive and the cost of funding for acquisitions increases. But O pays a nearly 5% 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 year.
Because most tenants are staples that remain strong during a recession, earnings should remain solid, as they did through the pandemic. There are also inflation adjustments built into the contracts.
O is a great way to pick up one of the very best income stocks on the cheap during a bear market.
Realty Income Corporation (NYSE: O)
Security type: Real Estate Investment Trust (REIT)
Industry: Retail properties
Price: $60.00
52-week range: $60.00 - $75.40
Yield: 5.0%
Profile: Realty Income is the world’s fourth largest REIT which specializes in retail staple properties and has an unparalleled track record of paying rising monthly dividends.
Positives
- The triple net leases and reliable tenants provide a stable backdrop for dividends.
- It’s a defensive company that pays a reliable income in a troubled economy.
- Realty has inflation adjustments built into its long-term leases, and real estate holds value during inflation.
Risks
- REITs can struggle during times of rising interest rates like this.
- The stock can continue to fall along with the market if things get worse, and they might.
Portfolio Updates
| CIA STOCK PORTFOLIO | |||||||
| Open Recommendations | Ticker Symbol | Entry Date | Entry Price | Recent Price | Buy at or Under Price | Yield | Total Return |
| Qualcomm Inc. | QCOM | 5/5/21 | $134.65 | $119.74 | NA | 2.48% | -8.50% |
| Visa Inc. | V | 12/22/21 | $217.96 | $180.59 | NA | 0.82% | -16.70% |
| Global Ship Lease, Inc. | GSL | 2/23/22 | $24.96 | $15.31 | NA | 9.51% | -36.34% |
| ONEOK, Inc. | OKE | 5/25/22 | $65.14 | $50.71 | $67.00 | 7.09% | -21.14% |
| Star Build Carriers Corp. | SBLK | 6/1/22 | $33.30 | $18.46 | NA | 34.37% | -37.55% |
| Intel Corporation | INTC | 7/27/22 | $40.18 | $26.97 | NA | 5.31% | -32.19% |
| The Williams Companies | WMB | 8/24/22 | $35.58 | $28.42 | $38.00 | 5.83% | -19.06% |
| Realty Income Corporation | O | 9/28/22 | $60.90 | $63.00 | 5.00% | ||
| EXISTING CALL TRADES | |||||||
| Open Recommendations | Ticker Symbol | Intial Action | Entry Date | Entry Price | Recent Price | Sell To Price or better | Total Return |
| OKE Oct 21st $65 call | OKE221021C00065000 | Sell | 8/24/22 | $3.40 | $0.07 | $3.40 | 5.22% |
| as of close on 9/26/2022 | |||||||
| SOLD STOCKS | |||||||
| 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% |
| Qualcomm | QCOM | Called | 6/24/20 | $89.14 | 9/18/20 | $95.00 | 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 | 4/14.2022 | $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% |
| 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./01/2021 | $2.00 | 10/15/21 | $2.00 | 3.95% | |
| USB Nov 19 $60 call | out-of-money | 9/24.2021 | $2.30 | 11/19.2021 | $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% | |
| QCOM Sep 16th $145 call | out-of-money | 7/20.2022 | $11.75 | 9/16/22 | 11.75 | 8.73% | |
>Global Ship Lease, Inc. (GSL)
Yield: 9.51%GSL, like many other growth and cyclical stocks, is near the 52-week low. The falling market along with recession fears is pulling it lower. The dividend should be safe as the company is very solid in terms of operational performance. Earnings are likely to remain resilient as long-term charters have already been locked in at higher rates than in the past. Also, Global Ship recently announced several new charter agreements that will boost earnings going forward. Shipping stocks may also be in a secular bull market as supply, especially container ships. The longer-term trajectory should be higher. HOLD
Global Ship Lease, inc. (GSL)
Next ex-div date: November 22, 2022, est.
Intel Corp. (INTC)
Yield: 5.3%Once again, technology stocks have taken the brunt of the market selling. Growth stocks are under pressure amid rising interest rates and inflation as growth rates and market multiples are adjusted. INTC was already cheap and reflective of the lower-margin days ahead in the upcoming quarters, but the stock sold off again anyway.
The chipmaker recently made a massive investment in chip production. It partnered with Brookfield for a $30 billion investment in a semiconductor fabrication plant where Intel will maintain majority control by providing 51% of the capital. It’s a big and bold move that could add fuel to future growth. The longer-term story gets better as the short-term story gets worse. The stock is dirt cheap with a very encouraging longer-term prognosis. HOLD
Intel Corporation (INTC)
Next ex-div date: November 4, 2022, est.
ONEOK, Inc. (OKE)
Yield: 7.1%The raging bear market didn’t spare the midstream energy companies. OKE got clobbered to the tune of 13% over the past couple of weeks despite the fact that the stock and the company’s business are well-suited to the current environment. Natural gas demand remains strong and will likely stay that way even in a recession. This is a company that grew earnings through the pandemic. But panicky markets tend to be indiscriminate in the short term. OKE should trend higher when the market stabilizes. The stock sells at a compelling valuation with a very high dividend that is safe. BUY
ONEOK, inc. (OKE)
Next ex-div date: October 29, 2022, est.
Star Bulk Carriers Corp. (SBLK)
Yield: 34.37%Most of what I said about GSL above is also true for SBLK. The intermediate term prognosis remains excellent for dry bulk shipping while the market is struggling with newfound worries about the U.S. and global economies. But dry bulk shipping still has a highly favorable supply/demand dynamic despite rates having dipped recently. Half of the position was sold to be cautious in this turbulent and unpredictable market. Hopefully, the remaining position can hold up and we can collect another huge dividend. HOLD
Star Bulk Carriers Corp. (SBLK)
Next ex-div date: November 24, 2022, est.
Qualcomm Corp. (QCOM)
Yield: 2.5%QCOM has fallen further in the recent technology bloodbath. Investors worry that inflation and high rates will cut into growth margins. At the same time, a slowing economy will hurt smartphone sales and Qualcomm’s profits. But the company is still posting strong results and is projected to continue to grow earnings by 23% in the second half of the year. The selling is overdone as earnings continue to be strong and the stock already sells at a cheap valuation. It can move higher fast and make up for lost time when the going gets good again. In the meantime, we generated a high income from the stock with call premiums. HOLD
Qualcomm Inc. (QCOM)
Next ex-div date: November 30, 2022, est.
Visa (V)
Yield: 0.8%Recent selling has taken V down to a new 52-week low. The shares had held firm around the 200 per share range during previous selloffs but the increasing likelihood of a recession moved the stock to a lower level. Recession is obviously bad for the transaction business, but the lower stock price already reflects some pain. It’s also worth noting that Visa is still recovering from the pandemic internationally and the increased global transaction resulting from the removal of covid restrictions offsets much of the economic weakness. HOLD
Visa Inc. (V)
Next ex-div date: November 12, 2022, est.
The Williams Companies, Inc. (WMB)
Yield: 5.8%Just about everything has moved lower, and even WMB is no exception. But the same things that I mentioned above about OKE are also true of WMB. Natural gas demand is resilient. Earnings per share shot up 29% in the first half of 2022 versus the same period last year. The recently reported quarter featured a whopping 48% earnings per share spike over last year’s quarter. Williams also increased 2022 earnings guidance. Like OKE, it offers value and a high and safe yield in an industry with strong dynamics. BUY
The Williams Companies, Inc. (WMB)
Next ex-div date: December 8, 2022, est.
Existing Covered Call Trades
Sold OKE October 21st $65 calls at $3.40 or betterThe stock is down a lot over the past couple of weeks and the price is about 14 per share below the strike price. We locked in a high premium when the going was good. It appears likely at this point that we will keep the stock, although there are still four weeks to go before expiration. OKE should perform well in this environment and a more stabilized market.
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 October 26, 2022.
