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Income Advisor
Conservative investing. Double-digit income.

Cabot Income Advisor 1220

The New Year promises to be a great one for dividend stocks. After underperforming the market in 2020, the stars are aligning to make 2021 the year of the dividend.

The distribution of the coronavirus vaccine promises to bring this pandemic to an end and unleash a full and robust recovery in 2021. Energy stocks that had been neglected in the market recovery have caught fire in anticipation of a full recovery in 2021.

A huge and overdue rally in the sector has paused temporarily ahead of a very promising year, giving us an opportunity to get into one of the very best stocks in the sector at a still cheap price.

Global energy giant Chevron (CVX) currently offers the rare combination of great value and momentum, as well as a fat yield. The stock has already moved higher, the rally has a long way to go.

Cabot Income Advisor 1220

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A Great New Year for Dividend Stocks
It sure has been a crazy year to say the least. Normally, I hate to see years pass because I don’t like getting older. But in this case I’ll make an exception. Good riddance 2020, and take your pandemic with you.

Have you had enough? The lockdowns and restrictions started in March and they’re still going strong, at least in my state. But it looks like there’s a light at the end of tunnel with these vaccines. This pandemic will likely come to an end in 2021, and it will be glorious.

Although the pandemic disrupted our lives and crashed the economy, the market loved it. All three major market indices are higher for the year and within a whisker of the all time highs. The S&P 500 is up over 14% YTD and the technology-laden Nasdaq is over 40% higher on the year.

The market has been driven higher primarily by technology stocks. These companies are absolutely thriving as people rely on technology more than ever during the lockdowns. But many real economy sectors had a miserable time of it and are still struggling with the lockdowns.

A notable underperforming group is dividend stocks. The SPDR S&P Dividend ETF (SDY), which tracks the High Yield Dividend Aristocrats Index, is down over 3% for 2020. And that’s after a huge rally in dividend stocks since the vaccine announcements in November.

Dividends have lagged because high dividend stocks in energy and finance are taking it on the chin during this pandemic. REITs and utilities were flying high before the bear market and have also underperformed. But things are changing fast.

As vaccines promise to end the pandemic and usher in a full recovery in 2021, previously neglected stocks have caught fire. The Energy Select Sector SPDR Fund (XLE) is up 37% since the November 9th vaccine announcement. The Financial Select Sector SPDR Fund (XLF) is up 17% over the same period. And that’s after a pullback over last two weeks. They were up more.

I don’t think the rally in these stocks is over. There’s still a long way to go to get back to where they were before the pandemic. Looking ahead to what many economists are forecasting to be the strongest year for economic growth in decades, the rally in energy and financial stocks may just be getting started.

Here are some other factors that should favor dividend stocks in 2021 as well:

  • Stocks are still cheap and offer value in an expensive market.
  • They will benefit from a full recovery on the other side of the pandemic.
  • They have momentum.
  • Rock bottom interest rates make dividend stock the only game in town for income.

That’s good news for income investors. And this newsletter should thrive in the New Year. High paying stocks have upside potential and should chase high call premiums. We should be able to keep ringing the register with fat dividend and calls.

What to Do Now
The recent market rally has enabled us to get high call premiums on existing portfolio positions. As a result, all but one of the stocks in this portfolio currently has an outstanding call. We are holding off on writing a call on Valero (VLO) so that we can get a benefit if the market keeps forging higher.

It’s been a great environment for selling covered calls, but not the best for buying stocks. Things are changing in the near term though. Energy and financial stocks have pulled back in recent weeks. Such a consolidation is normal after such a big spike higher in a short time. It also gives us an opportunity to get into some great stocks at cheaper prices ahead of a promising year.

In this issue I highlight a great energy stock. It offers the rare combination of value and momentum as well as a high dividend. The recent market hiccup is creating good buying opportunity.

Monthly Recap
November 23rd
Sold EPD Jan 15 $20 call at $0.80 or higher

November 25th
Purchase – U.S. Bancorp (USB) $44.68
Sell USB Jan 15 $45 call at $2.00 or higher

December 11th
Sell BGS February 19 $27.50 call at $2.40 or better

Featured Action

Buy Chevron Corporation (NYSE: CVX)
Yield 5.92%
Let’s tackle some of the negatives before anything else.

Energy is one frog-ugly sector. It is by far the worst performing S&P 500 sector this year. And that’s only after it started the year as a dog. At the beginning of 2020, the energy sector had been the worst performing market sector in every measurable period over the last ten years, by far. This year threw a beating to a sector that was already bloody.

The industry has a number of serious problems. Lately, the biggest problem is the pandemic and ensuing lockdowns. Demand for oil and gas crashed in this recession and prices followed suit. Energy is a cyclical industry and the past two quarters have been some of the worst economic quarters in history. By late October, the overall sector was down 50% for the year.

But that’s short term. Those issues will get fixed when the economy inevitably recovers. Once the economy kicks into full gear on the other side of this pandemic and energy stocks recover from the Armageddon pricing, they can again focus on the longer-term secular trench rot.

The industry has supply and demand issues because of the American energy renaissance. New technologies in horizontal drilling and hydraulic fracturing (fracking) enabled this country to unlock massive deposits of previously irretrievable deposits of oil and gas in shale rock formations across the country. U.S. oil and gas production exploded. Massive new supply on the world market caused an energy price crash in 2014 to 2016, from which the industry has still never recovered.

Then there’s the fact that fossil fuels represent the past, while alternative or clean energy owns the future. Look at the performance of clean energy stocks like Tesla (TSLA) and NextEra Energy (NEE). The market loves alternative energy and hates fossil fuels. Investors like to bet on the future. Fossil fuels are the past and the industry is slowly dying.

Amidst such an ugly backdrop, I am recommending Chevron (CVX), one of the world’s largest fossil fuel pushers. The reason is simple. Right now, it is a play on the vaccine and full recovery, which is a good bet. The stock has momentum and a long way to go to get to pre-pandemic prices. CVX has significant upside in just recovering from this pandemic. It still has a long way to go before longer-term supply/demand and clean energy issues come into play.

Plus, the industry isn’t dead yet. Sure, alternative energy is the fast-growing energy source of the future. But fossil fuels aren’t done by a darn sight. The U.S. still uses fossil fuels for 80% of energy needs, and that number is even higher internationally. Oil and gas won’t go out of style anytime soon.

Energy stocks are poised to benefit from the full recovery next year while still offering great value and high dividend yields. Now the sector has momentum too. And Chevron is the best of the best.

Chevron is one of the world’s largest integrated energy companies with operations throughout the world. The company is involved in every facet of the energy industry but it is heavily skewed toward the upstream segment, oil and gas production and exploration.

It has a huge and growing presence in the Permian basin, the largest shale oil producing region in the U.S. and the fastest growing oil region in the world.

I like energy stocks in general ahead of a full recovery in 2021. I like CVX in particular because it’s better than the other large oil companies. It started the pandemic in much better shape and is weathering the storm better.

The company has done a stellar job of getting leaner and meaner over the last several years. Chevron’s cost per dollar of BOE produced has fallen from $18 in 2014 to under $10 today. Chevron has lower costs and higher margins than its peers. The oil giant also hit this recession right. It completed several large projects in the past several years and had already wound down capital expenditures.

Beyond the planned reductions, Chevron also cuts the planned expenditures in 2020 from $20 billion to $14 billion to free up cash for the recession. While profits are still below pre-pandemic levels, they are much improved from the dark days of the recession in the second quarter. And things are rebounding fast. A full recovery in 2021 must increase energy demand and profits.

I like Chevron best among the majors because of its superior balance sheet and ability to turn things around quickly when the economy improves. But don’t take my word for it. The market agrees. CVX went down less than the other oil majors in the bear market and has responded better to the vaccine news. It has significantly outperformed its peers YTD.

Then there’s the dividend. It currently yields a spectacular 5.92%. The dividend should be safe as well. Chevron has raised the payout every year for the last 32 years, including through the financial crisis and the oil price crash from 2014 to 2016. The company’s Chief Financial Officer also said that maintaining the dividend through the pandemic is the company’s “number one financial priority.”

After wallowing in oblivion during the market recovery, the stock sprung to life after the vaccine announcements. It soared over 40% between late October and late November. It has since given back about a third of that gain, but that’s a normal consolidation after such a huge spike.

You haven’t missed the boat. Despite the recent rally, CVX is still down over 30% from the beginning of the year, and things weren’t great then. I believe in a full recovery in 2021, and CVX will surely benefit. The stock still has a long way to go to get back to pre pandemic levels and the market has given us a taste of what likely lies ahead.

The recent consolidation in the stock price presents a great opportunity to buy the stock at a great price ahead of what is likely to be a prosperous 2021. The stock also generates fat call premiums as many investors are willing to bet on higher prices in the future. It’s a good time to buy the stock and we should get great opportunities to write calls on the position as the stock regains traction.

Chevron Corporation (CVX)
Security type: Common stock
Industry: Energy
Price: $84.36
52-week range: $51.60 - $122.72
Yield: 5.92%
Profile: Chevron is one of the world’s largest integrated oil and gas companies with a strong emphasis on exploration and production.


  • Chevron began the recession in strong financial shape.
  • Large expenditures are behind the company and they are now reaping the benefits while costs are falling.
  • The stock is cheap compared to the overall market and its historic valuations.
  • The stock offers value and momentum.


  • The vaccine could sputter and the full recovery could be delayed.
  • The energy sector has long term problems besides the current recession.

Portfolio Updates

AbbVie Inc. (ABBV)
Yield 5.0%
I love this biopharmaceutical stock longer term. It has the huge tailwind of the aging population and offers a great array of cutting-edge treatments and one of the best pipelines in the business. It also sells at a cheap valuation and pays a fat dividend that will likely continue to grow. But the near term is much harder to predict.

The stock had a huge run recently and made a new 52-week high. But it has been pulling back in the last several weeks. That’s a normal pattern for the stock. It spikes higher and then pulls back and consolidates for a while. Although it could always break out to a new level, a near-term pullback is consistent with the recent past. For that reason, we wrote a call on the stock with a strike price of 100 per share (currently 103.43). HOLD


Altria (MO)
Yield 8.0%
This stock has broken out of late. It moved over 20% higher between late October and Friday’s close. While that’s a decent move in a short time, MO still hasn’t broken out of the long-term downtrend. There will likely need to be evidence that the company has a growth source sufficient to offset the secular decline in smoking. In the meantime, the dividend is safe and the stock is enjoying the rally in dividend stocks.

The stock has moved well beyond the strike price of the January 15th calls that have been written with a 40 per share strike price (currently 43 per share). We’ll see what happens over the next month. But no matter what, we are set up to score a very high income return from a stock that has done very little. HOLD


B&G Foods, Inc. (BGS)
Yield 6.4%
After floundering and sputtering since the end of the summer, this packaged food company stock has found new life in December, moving up 13% since December 2nd. It’s broken out of the sideways funk and is now within taunting distance of the 52-week high. The worsening virus has rekindled investor interest as B&G will likely enjoy the pandemic earnings bonanza for longer as people continue to eat at home more during the lockdowns.

I like the stock long term too. It should maintain a higher level of earnings than before the pandemic for some time and the dividend is now safe. But the recent superficial rally won’t last forever as the vaccine will eventually get rid of the lockdowns. But in order to cash on this virus pessimism amidst the vaccine euphoria, we wrote a covered call. Consequently, we will generate a high income regardless of what the virus or the stock does in the near term. BUY


Enterprise Product Partners (EPD)
Yield 8.7%
Okay, the recent rally has petered out. After months and months of oblivion, EPD caught fire after the vaccine announcement and soared 30% since beginning of November. But it has pulled back about 7% in the last week and a half. That’s normal after such a dramatic spike. The reason for the rally, an end to the pandemic in 2021, is still intact. And the stock still has a long way to go to get to pre-pandemic levels.

I believe EPD will have a strong 2021. But it may have gotten ahead of itself in the near term. The calls that expire in mid January have a strike price of 20 per share (currently 20.22). If the sector and the stock consolidate and sputter over the next four weeks or so, we will still lock in a strong income from the vaccine lift. If energy stocks continue to rally, we still have VLO. BUY


U.S. Bancorp (USB)
Yield 3.7%
This is a great bank that is one of the most highly profitable and resilient among its peers. Right now, it offers great value from a stock that is in an uptrend. The end of the pandemic next year will most certainly improve the profits of USB as well as the appeal of banks stocks. The sector also got a boost after the Central Bank announced is will allow banks to buy back shares again, after suspending the privilege during the pandemic. USB has broken slightly above the 45 strike price for the January calls written. But we’ll see what happens in the next month. BUY


Valero Energy (VLO)
Yield 7.2%
This high leverage play on a full economy recovery has run out of steam for the moment. After a stratospheric surge of 70% in five weeks, VLO has pulled back about 12%. That’s to be expected after such a huge move. At 53.69 per share this stock still has a long way to go to get to the pre-pandemic high of about 100. While it’s tough to predict how the stock might knock around in the near term, it should have another big move higher in the New Year as the recovery gains traction. It’s a good time to buy the stock if you don’t own it already. BUY


Call Trades
Sell ABBV Dec 31 $100 call at $3.30 or higher
These calls only have about a week until expiration. With little time value left and downward momentum the calls are back to about 3.35. There is a good chance that the stock continues moving lower in the next week and closes below 100 per share (currently 102.81). In that case we will get a chance to write yet a third call on this position.

Sell EPD Jan 15 $20 call at $0.80 or higher
The stock cooled off and the call price is down to 0.76, below the target price. I’m happy to continue owning the stock and collecting the dividend if the stock isn’t called. Right now it’s priced right around the strike price with about four weeks until expiration. We’ll see what kind of a mood the market is in come January.

Sell USB Jan 15 $45 call at $2.00 or higher
This stock has held its own in the recent consolidation and remains a little above the strike price at 45.58 per share. The options have fallen below the target price to 1.71 as time value has elapsed. It’s also worth noting that we already got a 9% return from this same stock earlier in the year when it was called away.

Sell MO Jan 15 $40 call at $1.90 or higher
The stock is really moving for a stodgy income stock that the market hates. MO has moved well above the 40 strike price to 42.55 per share and the calls are currently priced at 2.60. Despite this being an underperforming stock, we are set up for great income returns. If the stock closes above the 40 strike price in a month, we will lock in a 16.1% return in seven and a half months (between the 3 dividends and the 2 calls). If not, we will have locked in a 15.3% income return.

Sell BGS February 19 $27.50 call at $2.40 or higher
This stock keeps powering higher. It’s now within pennies of the 52-week high at 31 per share. The in-the-money calls are now priced well above the target price at 3.65. It has a long way to go until February 19th and the market tends to shun this stock as the virus news improves. The calls are still worth selling here if you haven’t done so already

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.

CIA Jan 21 Calendar

CIA Feb 21 Calendar

The next Cabot Income Advisor issue will be published on January 27, 2020.

Cabot Wealth Network
Publishing independent investment advice since 1970.

CEO & Chief Investment Strategist: Timothy Lutts
President & Publisher: Ed Coburn
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