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Income Advisor
Conservative investing. Double-digit income.

Cabot Income Advisor 620

This is a fantastic environment for income. The upward bias of the market is creating high call premiums. And certain pockets of the market still offer deep value and higher dividend yields than have existed in many years.

In this issue I identify three excellent dividend stocks to buy now.

One is a high yielding energy play with a stratospheric, but safe, yield. Another is one of the most defensive and reliable income generating stocks in the market that still offers good value and a strong yield. And the third is a technology stock that sells at a reasonable price with an incredibly strong catalyst for the stock price to shoot up in the future.

The issue also includes covered calls on these same stocks that will provide a double digit income in a short time if the stocks move higher, and a great income return if they don’t.

Cabot Income Advisor 620

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A Great Market for Income
Welcome to the second ever issue of Cabot Income Advisor. I’m honored to be your trusted partner in generating a high income in this low interest rate environment. In the last issue, I recommended the purchase of three stocks. In the following days and weeks, I issued alerts to sell covered calls on two of those positions, which I will recap in the sections below.

This is a new newsletter and a new experience. If you have any questions about how the “Special Alerts” work, or if you just haven’t found your rhythm with CIA yet, please let me know if I can clarify anything for you by emailing me at Also please tune into the first monthly video presentation this Thursday at 2 p.m. for the Cabot Retirement Club and feel free to ask questions in the live Q&A after the video.

This market continues to look solid. The rally from the bottom in late March was interrupted earlier this month as news of increased spreading of the virus and a gloomy outlook from the Fed spooked the market. But after that big down day the market has resumed its ascent.

It’s a market that just looks like it wants to go higher. It tends to move higher when the news is neutral and quickly rebound from selling. The three-month rally is still intact. That may seem odd with the self-induced economic crash and the country still in a partial lockdown. But the market is looking forward.

It sees a booming economy in the third and fourth quarters and a friendly Fed. Interest rates are again near all-time lows and money has no place else to go but stocks to fetch a decent return. Also, the Fed has indicated it will act to backstop the market if it turns south again. As well, there is still a ton of cash lying around to potentially enter the market.

Investors like the idea of an economy growing at breakneck speed combined with an accommodating Central Bank. As I mentioned in the last issue, I think the market has moved up very far very fast and there is downside risk going forward. But for now, stocks seem to want to go higher.

This is a great market for income. The upward bias of the market is creating very attractive call premiums with which to supplement income. At the same time, certain stocks and sectors remain low priced and high yielding despite the level of the overall market. I found several stocks that are not only generating great income opportunities now, but that I’m also comfortable holding if the market reverses course.

Monthly Recap
In the inaugural issue which became available on June 2, this advisory highlighted three stocks to buy including cigarette maker Altria (MO), biopharmaceutical company AbbVie (ABBV), and marijuana farm REIT Innovative Industrial Properties (IIPR). After that, two “Special Alerts” were sent to you to write covered calls on two of those stock positions.

On June 3 a “Special Alert” was sent to sell a covered call on IIPR (Sell IIPR July 17 $95 call at $3 or higher). The weekly update on June 17 included a “Special Alert” to sell a covered call on the MO position (Sell MO July 31 $42 call at $1.60 or higher).

What to Do Now
All three stocks from the last issue (ABBV, MO, and IIPR) still offer a compelling value at the current price and are still worth buying if you have not done so already. However, the opportunity to write the calls at the specified prices and expiration dates has passed. The thing to remember about call prices is that they are very volatile and you need to act quickly after receiving the sell recommendation in a “Special Alert,” weekly update or monthly issue.

There may be other opportunities to write calls on those stocks in the future. I try to target strike prices that have a good chance of not being reached, so that you can continue to write more calls and collect more dividends in the future. If the stock price does run up past the strike price and your position is called away, you may miss out on some capital appreciation, but you will get a double-digit return in a short amount of time for your trouble.

The current market has an upward bias with growing downside risks. It’s a good market to get fat call premiums and, in certain cases, high yields. But there is a chance the market turns south. All of the recommendations, the three last month and the new three this month, are stocks I’m comfortable holding through a down market. All the stocks offer compelling valuations and should bounce back quickly after a selloff.

In this issue, I highlight three stocks to buy and at the same time offer covered call ideas on those same stocks. The simultaneous purchase of a stock and the writing of a call is called a buy/write. The current environment is ripe for such a strategy. As usual, I recommend selling a call that represents the position. If you buy 500 shares, write 5 calls. If you have 1,000 shares, write 10 calls.

Featured Action

This month I target three very different kinds of dividend stocks. One is a deep value, high yielding stock from the energy sector. Another is a rock steady income earning stock with good momentum that still sells at a discount. And the other one is technology stock with a lot of upside price potential that generates high call premiums.

Enterprise Product Partners (EPD)
Yield: 9.20%

Enterprise is one of the largest midstream energy companies in the country with a vast portfolio of service assets connected to the heart of American energy production. It has $36 billion in annual revenues from an unparalleled reach in the industry that is connected to every major U.S. shale basin and 90% of American refiners east of the Rockies, and offers export facilities as well in the Gulf of Mexico.

This isn’t some exploration and production company whose fortunes live and die with the price of oil and gas. This is a midstream energy companies that facilitates the transport and storage of oil and gas and collects fees for providing that service. It’s not dependent on volatile commodity prices. In fact, 88% of earnings are fee-based and backed by guaranteed contracts.

And the country is in the midst of an energy boom. The U.S. went from producing about 5 million barrels of oil per day in 2007 to over 13 million before this recession. This country is now the world’s number one producer of both oil and natural gas. Sure, oil and gas throughput volume have been disrupted during the pandemic, temporarily. But as the economy restarts oil and gas will be sloshing around again. And Enterprise will recover much quicker than most of the energy sector.

The Distribution
Let’s get down to business. Is that monster 9.2% yield safe? The answer is yes. Here’s why.

The partnership went public in 1998. It has raised the dividend every single year since. That includes through the financial crisis and the oil price crash between 2014 and 2016 that wreaked havoc in the industry. But Enterprise went into this current crisis in what, company management claims, is the best financial shape ever with low debt and flush with cash.

Enterprise also has one of the lowest payout ratios in the industry, at just 62.5% of distributable cash flow. The reason for the low payout is that the company has been self-funding much of its growth projects. It’s much cheaper to fund expansions in this way because the company saves the cost of borrowing money or issuing new stock. But the company has reduced growth investments for the duration of the recession.

That gives the company an enormous amount of leeway for the distribution. It is highly unlikely that its stable earnings will be diminished enough to threaten the dividend even temporarily (earnings actually grew in the first quarter). But, as an added level of protection, the company has $6.4 billion in cash and cash equivalents from which to pay a $4 billion annual distribution.

The Future
Energy is in the doghouse with investors right now, as demand has plummeted during the pandemic. But energy will power the recovery. In the meantime, EPD is dirt cheap, selling at half the 2014 high despite the fact that earnings are much higher now. Looking ahead, there is still a huge shortage of infrastructure assets to accommodate all the new oil and gas production. Enterprise has a long runway for growth projects. In fact, it has about $6 billion in new assets coming online this year and next.

Enterprise Product Partners (EPD)
Security type: Master Limited Partnership (MLP)
Industry: Energy (Midstream)
Price: $19.39
52-week range: $10.27 - $30.87
Profile: Enterprise is one the largest midstream energy MLPs in the country with a vast portfolio of service assets connected to the heart of American energy production.


  • As U.S. energy production continues to accelerate there should be strong demand for EPD’s services.
  • The big 9.2% yield should be quite safe.
  • The stock is at a historically dirt-cheap valuation.
  • An enormous amount of new projects coming online should give earnings a sizable boost in the years ahead.


  • The energy market is unpredictable and a steep fall in the price of energy commodities will hurt performance.
  • The NGL market is still unproven and EPD has large exposure.
  • The stock price could take another hit if the market has a significant selloff or the economic recovery is disrupted.

Brookfield Infrastructure Partners (BIP)
Yield 4.55%

Bermuda-based Brookfield Infrastructure Partners owns and operates infrastructure assets all over the world. The master limited partnership (MLP) focuses on high-quality, long-life properties that generate stable cash flows, have low maintenance expenses and are virtual monopolies with high barriers to entry.

Brookfield operates a current portfolio of over 1,000 properties in 30 countries on five continents. It is well diversified geographically with roughly 25% in North America, 30% South America, 25% Europe and 20% Asia Pacific. The partnership operates four segments: Utilities, Transport, Energy Services and Data Infrastructure. Assets include toll roads in South America, data centers on five continents, railroads in Australia and North America and utilities in Brazil.

Infrastructure investments are coming into vogue as the world is in desperate need of updated infrastructure. Developed economies have badly aging systems in need of replacement and emerging markets have infrastructure that is woefully insufficient to accommodate growing urban populations and more advanced economies. The G-20’s global infrastructure hub estimates that a global investment of $94 trillion will need to be invested in the next several decades.

But Brookfield has been at this game for a long time and was one of the first to the party. Take a look at how things have worked out. From 2009 until 2020 funds from operations (FFO) have grown an average of 16% per year and the distribution has grown an average of 11% per year over the same period. Since its IPO in January of 2008, BIP has returned 547% (with dividends reinvested) compared to a return of just 181% for the S&P 500 over the same period.

The Distribution
As a Master Limited Partnership (BIP), Brookfield pays no income taxes at the corporate level provided it pays out the bulk of earnings in the form of distributions. The partnership can pay a higher distribution that a regular corporation because it pays out money normally lost to taxes. The current payout has a solid 4.5% yield.

Looking ahead, there are actually more opportunities for growth than before. Infrastructure assets and projects are popping up all over the world. BIP has recently adapted an “asset rotation” strategy whereby the partnership sells more mature assets for higher margin new assets. In addition to acquiring new assets, BIP is upgrading the existing portfolio.

The company is targeting 12% to 15% return on equity over the long term as well as 5% to 9% annual distribution growth. That’s a realistic goal, and one that Brookfield has been consistently able to achieve in the past. Those metrics should produce returns on par with those of the past.

Brookfield Infrastructure Partners (BIP)
Security type: Master Limited Partnership
Industry: Utilities (Infrastructure)
Price: $42.46
52-week range: $23.01 - $50.28
Yield: 4.5%
Profile: As a member of the highly successful Brookfield Asset Management (BAM) family, BIP invests in infrastructure assets all over the world.


  • The stock derives revenue from some of the most reliable income generating assets in the world that thrive in any economy.
  • Growth opportunities should abound as the world will have to spend trillions on infrastructure assets.
  • BIP already has over a decade long track record of successful performance.


  • Investors could sour on the company’s international exposure as the global economy struggles.
  • There is political risk in several of the countries in which it operates.

Qualcomm (QCOM)
Yield 2.9%

This has been a rapid recovery since the lows of March for the overall market. Prior to the selloff, it had been a strong bull market since the financial crisis, with the S&P 500 returning well over 300%. But the strong performance was only made possible by the Technology sector.

The Technology sector of the S&P 500 has been the index’s top-performing sector for the past 10-year, 5-year, 3-year, 1-year, and year-to-date periods. The outperformance is staggering. Technology outperformed the index by 226% in the last 10 years, 335% over the last five, and 311% over the last three.

We are in a technological revolution and technology stocks are driving the market. Without technology, it would have been a lame bull market and much more severe and lasting bear market. While most technology stocks are expensive, I found one that is relatively cheap.

Qualcomm is the world’s largest supplier of chips for mobile devices. It also holds the patents for the key technology systems that are the backbone of all 3G and 4G networks. In 2018, chips accounted for 76% of revenues while licensing from patents accounted for 23%.

But the main reason to buy Qualcomm now is 5G. It is far more than just an incremental advancement in cellular technology. It is a game changer that will tip the world into a whole new digital age. It will enable a new generation of technologies including self-driving cars, artificial intelligence, robotics and more. And it’s right around the corner.

Qualcomm is the undisputed king of the chips that will enable 5G technology. It makes the only good smartphone chip for 5G, and that market is about to grow like crazy. Market research firm Research and Markets estimates that the annual growth rate for 5G chipsets will be 63.4% from 2020 to 2027.

Qualcomm has already partnered with 30 smartphone makers that will use its chips and equipment. And the new 5G-enabled phones will start hitting the market this year. Over 75 5G devises are either in the process of being launched or in development.

There should be considerable growth ahead for the chipmaker. Analysts estimate Qualcomm will grow annual earnings by an average of 25.7% over the next five years. But despite the fact that the company is on the precipice of booming growth and 5G will be a huge story in the market after the pandemic, the stock is still relatively cheap at 8% from the high and less than 16 times forward earnings.

It’s cheap because semiconductor companies are cyclical, at a time when the economy has crashed, and it does a lot of business in China, at a time when relations are strained. But those factors have kept the stock cheap ahead of a massive growth wave and a strong economic recovery. The stock only yields 2.9% but the growth potential makes for sizable call premiums.

Qualcomm (QCOM)
Security type: Common Stock
Industry: Technology (semiconductors)
Price: $89.13
52-week range: $58.00 - $96.17
Yield: 2.9%
Profile: Qualcomm is the world’s leader supplier of chips for mobile devcses and holds key patent technology for cellular network infrastructure.


  • QCOM has by far the best chip for mobile technology and 5G.
  • The company has already inked deals with 30 OEM manufactures for its 5G chips.
  • A massive increase in demand should hit the market as the economy recovers and demand for phones springs back.
  • The stock is cheap ahead of what is likely to be rapidly growing revenue and earnings.


  • The company faces pending legal issues regarding its licensing practices that will likely hurt royalty revenue to some degree.
  • Frictions with China are holding back semiconductor sales and causing investor angst about the company.
  • This is a cyclical stock at a time when the economic recovery is still in question.

Covered Calls

Sell EPD August 21 $21 call at $0.65 or higher
Expiration date: August 21
Strike price: $21
Call price: $0.65 or higher
Return possibilities at $19.50 purchase price

  1. The stock goes above $21
    Call premium: $0.65
    Dividend: $0.445 (the ex-dividend date is July 29th)
    Appreciation: $1.50 ($21 strike price minus $19.50 purchase price)
    Total: $2.59 (total return will be 13.3% in about 2 months)
  2. The stock price stays the same
    Call premium: $0.65
    Dividend: $0.445
    Total: $1.09 (total return will be 5.6% in 2 months)
  3. The stock price declines
    You will be down by however much the stock is down less the $1.09 from the dividend and the call. And the position will live to pay more dividends and write more calls in the future.

Sell BIP September 18 $45 call at $2.10 or higher
Expiration date: September 18
Strike price: $45
Call price: $2.10 or higher
Return possibilities at $43 purchase price

  1. The stock goes above $45
    Call premium: $2.10
    Dividend: $0.485 (the ex-dividend date is August 28 est.)
    Appreciation: $2.00 ($45 strike price minus $43 purchase price)
    Total: $4.58 (total return will be 10.7% in less than 3 months)
  2. The stock price stays the same
    Call premium: $2.10
    Dividend: $0.485
    Total: $2.58 (total return will be 6.0% in a little under 3 months)
  1. The stock price declines
    You will be down by however much the stock is down less the $2.58 from the dividend and the call. And the position will live to pay more dividends and write more calls in the future.

Sell QCOM September 18 $95 call at $4.30 or higher
Expiration date: September 18
Strike price: $95
Call price: $4.30 or higher
Return possibilities at $90 purchase price

  1. The stock goes above $95
    Call premium: $4.30
    Dividend: $0.65 (the ex-dividend date is September 3 est.)
    Appreciation: $5.00 ($95 strike price minus $90 purchase price)
    Total: $9.95 (total return will be 11% in a little less than 3 months)
  2. The stock price stays the same
    Call premium: $4.30
    Dividend: $0.65
    Total: $4.95 (total return will be 5.5% in a little less than 3 months)
  1. The stock price declines
    You will be down by however much the stock is down less the $4.95 from the dividend and the call. And the position will live to pay more dividends and write more calls in the future.

Portfolio Updates

AbbVie Inc. (ABBV)
Yield 4.8%
Aside from its other great qualities, AbbVie is in the wheelhouse of the current market. Healthcare has been a strong market performer of late, as investors are attracted to the defensive business. Of course, Technology has been the best-performing sector. And, as a biopharmaceutical company, AbbVie is a combination of Healthcare and Technology.

The stock is up about 7.5% since it was first recommended. It continues to be a good value as the market underestimates the ability of its new drugs and pipeline to overcome increased competition for its blockbuster Humira drug. It is the only position recommended that I have not written a call on. The reason is greed. The stock is just about at the 52-week high and appears poised to move still higher. I’m waiting for a higher price to write a call. BUY


Altria (MO)
Yield 8.3%
As I mentioned, I believe Altria is a great value at this point with a sky-high yield that is safe. Despite the troubles with the JUUL acquisition, this is a company that continues to consistently grow earnings and generate plenty of free cash flow to pay the dividend. The beaten-down stock is one of the best income opportunities I’ve seen in a long time.

The stock is trading above where it was purchased on June 2 and a little below the price when the sale of a call was recommended. From last week’s price you will generate 8.1% if the stock is higher than the strike price at expiration or 6% if it is not in five weeks. Also, your returns will be higher if you purchased the stock on the first issue date. BUY


Innovative Industrial Properties (IIPR)
Yield 4.4%
This marijuana farm REIT looks strong. The marijuana sector has had a rough year and many companies in the sector are struggling to turn a profit in an industry in its infancy. But IIPR is making money like crazy. It doesn’t rely on prices or have to face stiff competition. It has a sweet set-up by charging rent to companies that grow the stuff. The stock is also up nicely since the initial issue and it is currently trading above the $95 strike price.

I need to issue a correction. In the “Special Alert” where I recommended writing the call I listed a dividend of $1.23 per share, but the dividend will actually be $1.06. The estimated returns will be slightly reduced. But there is a strong chance that this stock closes above the strike price on the expiration date and will generate a double-digit return in a short amount of time.


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.

July CIA 062320

Aug CIA 062320

The next Cabot Income Advisor issue will be published on July 22, 2020.

Cabot Wealth Network
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Copyright © 2020. All rights reserved. Copying or electronic transmission of this information is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. No Conflicts: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to its publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: All recommendations are made in regular issues or email alerts or updates and posted on the private subscriber web page. Performance: The performance of this portfolio is determined using the midpoint of the high and low on the day following the recommendation. Cabot’s policy is to sell any stock that shows a loss of 20% in a bull market or 15% in a bear market from the original purchase price, calculated using the current closing price. Subscribers should apply loss limits based on their own personal purchase prices.