A Huge Opportunity in the Safe Space
It’s been a tough market for covered calls. Although the market has rallied off the low, call premiums are subdued because investors are less willing to bet on higher prices in the future with still high inflation, a hawkish Fed, and a looming recession.
Many of the more successful positions were called away at options expiration as they exceeded the strike price. But in hindsight it was beneficial to take those profits as well as generate a high income. Many of the remaining portfolio positions left are more cyclical stocks that have fallen below the purchase price. Several more defensive positions have since been added to the portfolio.
Looking forward, although the market indexes may not have bottomed yet, there is great opportunity in interest rate-sensitive stocks. It may not be a great time to sell covered calls. But it is a good time to buy certain stocks that can generate strong call premiums down the road.
The late summer selloff that drove the market to new lows didn’t account for recession. It focused instead on the current rising interest rates and inflation, which the inevitable recession should subdue. Meanwhile, some of the very best recession stocks were crushed.
As interest rates spiked to the highest level since 2007, conservative dividend stocks took a beating. Higher rates mean that fixed-rate investments become more competitive and dividend stocks pay the price. But recession pressures interest rates lower and some of the most defensive stocks fell near the 52-week lows.
The best recession stocks got dirt cheap ahead of an inevitable recession. While the market indexes probably haven’t bottomed yet, interest rate-sensitive stocks may well have. It’s premature to invest for recovery overall, but the recovery may have begun in certain utility stocks.
In this update, I highlight one of the very best conservative dividend stocks on the market. It’s dirt cheap, made for recession, and has a phenomenal track record.
Trades past month
October 21
OKE October 21 $65 calls at $3.40 – Expired
October 26
Purchased Xcel Energy (XEL) - $62.57
November 9
Buy Brookfield Infrastructure Corp. (BIPC)
TRADE ALERT
Buy Brookfield Infrastructure Corporation (BIPC)
Yield 3.35%
BIPC is stock representing shares in the same enterprise as former portfolio position Brookfield Infrastructure Partners (BIP), except that instead of a Master Limited Partnership, BIPC is in the form of a regular corporation.
Unlike an MLP, BIPC doesn’t generate a K-1 form at tax time or have special tax implications in a retirement account. Dividends generate a regular 1099 and are taxed at the maximum 15% (or in some cases 20%) rate. Shares are also more actively traded and typically generate higher call premiums than BIP because funds and institutions that are prohibited from buying MLPs can now buy the stock.
Since the BIPC shares were established in early 2020, they have outperformed BIP shares to the tune of about 30%. That’s because demand for shares is higher because more investors can buy them and others find owning a regular corporation more desirable. BIP was chosen for this newsletter when it was purchased in early 2021 because options were not yet traded on BIPC. But now they are.
Bermuda-based Brookfield Infrastructure Corporation owns and operates infrastructure assets all over the world. The company 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.
Infrastructure is defined as the basic physical structures and facilities needed for the operation of a society or enterprise. It includes things like roads, power supplies and water facilities. Not only are these some of the most defensive and reliable income generating assets on the planet but infrastructure is rapidly becoming a more timely and popular subsector.
The world is in desperate need of updated infrastructure. The private sector is filling the need as governments don’t have all those trillions lying around. Limited partnerships, giant sovereign-wealth funds, multilateral and development-finance institutions are raising billions of dollars a year for infrastructure investments. It’s almost becoming a new asset class.
As one of the very few tested and tried hands, Brookfield is right there. It’s been successfully acquiring and managing these properties for more than a decade in a way that delivers for shareholders. Since its IPO in 2008, the original BIP has provided a total return of 797% (with dividends reinvested) compared to a return of 244% for the S&P 500 over the same period. And those returns came with considerably less risk and volatility than the overall market.
Brookfield operates a current portfolio of over 1,000 properties in more than 30 countries on five continents. The company operates four segments: Utilities (30%), Transport (30%), Midstream (30%) and Data (10%).
Assets include:
- Toll roads in South America
- Telecom towers in India and France
- Railroads in Australia and North America
- Utilities in Brazil
- Natural gas pipelines in North America
- Ports in Europe, Australia and North America
- Data centers on five continents.
Brookfield has a rapidly growing presence in data which includes cell towers and data and centers and natural gas midstream assets in North America. The partnership recently committed to a joint venture with Intel to invest in a chip production facility. A large acquisition of Inter Pipeline made last year is currently boosting the bottom line. While Funds from Operations (FFOs) have averaged 15% annual growth since 2009, the most recent quarter grew FFO at 24%.
The recent emphasis is part of Brookfield’s asset rotation strategy whereby the partnership sells lower returning mature assets and buys higher-margin ones. So far it seems to be working. The data assets are clearly forward looking, and Brookfield should also continue to benefit from the liquid natural gas (LNG) boom as Europe is desperate for more natural gas because of the war and Asia has huge demand as well.
The dividend is rock solid with a low 70% payout ratio and a history of steady growth. The payout has grown by a CAGR (compound annual growth rate) of 10% per year since 2009 and the company is targeting 5% to 9% annual growth going forward.
Brookfield is a good long-term investment anytime, as the above numbers for BIP illustrate, but it is particularly attractive now because it’s cheap and can well navigate both inflation and recession. The recent interest rate spike caused a major selloff in defensive dividend-paying stocks and pulled BIPC all the way down near the low.
Also, 85% of revenues are hedged to inflation with automatic adjustments built into its long-term contracts and its crucial service assets should be extremely resilient in a recession.
Shares are already trending higher since the low of early October. BIPC should continue to trend higher and provide hefty call premiums that can turbo charge the income.
Portfolio Recap
Global Ship Lease, Inc. (GSL)
Yield: 8.4%
It’s been ugly for shipping companies as cyclical stocks took a hit as the recession threat grew despite powerful secular dynamics in the industry and with Global in particular. Shipping rates have come down recently but are still higher than in past years and the supply/demand dynamic indicates a likely secular bull market for the industry. Near-term headwinds have dragged the stock down but the company continues to impress operationally.
Global has greatly expanded its fleet and booked higher contract rates for charters than existed before. Last week’s earnings report showed revenue growth of 64% and earnings per share growth of 37% over last year’s quarter. For the first nine months of the year, EPS is up 100% over the same period last year. Yet, despite having moved well off the low of September, GSL still trades almost 40% below the 52-week high. HOLD
Intel Corp. (INTC)
Yield: 5.1%
This stock may well have bottomed out. Earnings were terrible again but that’s probably already baked into the price. The near term is ugly, but the dividend is safe, and the future could be very bright. INTC currently sells near book value. It also has significant promise in its growing foundry business that should be further aided by government subsidies. The company isn’t at risk of bankruptcy and the dividend is significant with a low payout ratio. Hopefully the bottom is in on a stock that should perform well over the long term. HOLD
ONEOK, Inc. (OKE)
Yield: 6.0%
ONEOK reported earnings that beat estimates for the third quarter and expects a more than 10% increase in net income for 2023. Demand and volumes for natural gas continues to be resilient and is expected to remain so as demand in Europe and Asia remains huge. The stock has been trending consistently higher since the low of late September. It’s up well over 20%. Earnings rose even during the pandemic and this company should be solid in a recession. Plus, ONEOK has automatic inflation adjustments built into its contracts. The high dividend and resilient business should make OKE a strong holding going forward. BUY
Realty Income Corp. (O)
Yield: 4.7%
Earnings for this legendary income REIT surpassed estimates as it declared its 100th consecutive quarterly dividend increase. Revenue soared 80% as results continue to reflect the merger with VEREIT that was completed a year ago. Normalized funds from operations per share rose 9% compared to last year’s third quarter and 7.7% from the last quarter. Realty’s typical tenant of essential businesses like drug stores, convenience stores and supermarkets enabled it to continue raising the dividend through the pandemic and should prove resilient in this recession. BUY
Star Bulk Carriers Corp. (SBLK)
Yield: 33.7%
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 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. There are key dates ahead. One is the earnings report on November 16. The other is the ex-dividend date the following week. The dividend is so massive it’s important to hold the stock and get the next one. HOLD
Qualcomm Corp. (QCOM)
Yield: 2.7%
Qualcomm delivered earnings last week that disappointed the market. The current quarter met expectations with 22% revenue growth and 23% earnings growth but reduced expectations for next year sunk the stock about 8% on the day of the report. QCOM fell to a new 52-week low but has since been recovering.
The main issue is that smartphone sales are falling as it gets later in the upgrade cycle and the economy deteriorates. Analysts now expect just 5% revenue growth and 2% earnings growth in 2023. It’s taking the brunt of the cyclical nature of the business. But slowing phone sales have already been anticipated and have been hitting QCOM all year. QCOM now sells at just 9 times forward earnings. Things stink now but the stock is also setting up for massive returns when the cycle turns. HOLD
Visa Inc. (V)
Yield: 0.9%
Visa reported earnings last week that once again killed it. Revenue spiked 22% and earnings were up 27% from last year’s quarter. The payments processing giant continues to benefit from the end of Covid restrictions despite the slower economy. V got a nice bump after earnings. But the situation is murkier going forward as the U.S. and global economies continue to deteriorate and the dollar continues to rise in value. We’ll continue to hold the stock for now as it can move higher quickly when the market turns. HOLD
The Williams Companies, Inc. (WMB)
Yield: 5.0%
This midstream energy company has quietly been on fire. It’s up over 40% from the low of late September and is within about 10% of the 52-week high. Williams reported earnings that topped estimates with earnings growth of 15% over last year’s quarter. A big reason for the strong earnings is resilient natural gas demand, something that is likely to endure through the recession based on shortages overseas. The stock is getting a bump and the good times should continue. BUY
Xcel Energy Inc. (XEL)
Yield: 3.0%
This clean energy utility was oversold in the September market plunge. The market seems to agree as XEL is up over 17% since the low in mid-October. This stock does tend to bounce around a lot on a longer-term upward trend. It should also benefit from new legislation from Washington that will reduce costs on its considerable clean energy production. The stock should be solid in a recession, and we got in at a good price. BUY
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 | $112.54 | NA | 2.67% | -14.00% |
| Visa Inc. | V | 12/22/21 | $217.96 | $201.33 | NA | 0.90% | -6.93% |
| Global Ship Lease, Inc. | GSL | 2/23/22 | $24.96 | $17.95 | NA | 8.46% | -25.36% |
| ONEOK, Inc. | OKE | 5/25/22 | $65.14 | $62.66 | $67.00 | 5.97% | -0.76% |
| Star Buld Carriers Corp. | SBLK | 6/1/22 | $33.30 | $19.93 | NA | 33.69% | -32.58% |
| Intel Corporation | INTC | 7/27/22 | $40.18 | $28.48 | NA | 5.13% | -27.47% |
| The Williams Companies | WMB | 8/24/22 | $35.58 | $33.96 | $38.00 | 5.01% | -3.29% |
| Realty Income Corporaton | O | 9/28/22 | $60.37 | $63.34 | $63.00 | 4.70% | 5.79% |
| Xcel Energy Inc. | XEL | 10/26/22 | $62.57 | $66.09 | $65.00 | 2.95% | 5.63% |
| Brookfield Infrastructure corp. | BIPC | $43.05 | $46.00 | 3.35% | |||
EXISTING CALL TRADES | |||||||
| Open Recommendations | Ticker Symbol | Intial Action | Entry Date | Entry Price | Recent Price | Sell To Price or better | Total Return |
| as of close on 11/08/2022 | |||||||
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% | |
| OKE Oct 21st $65 call | out-of-money | 8/24/22 | $3.40 | 10/21/22 | $3.40 | 5.22% | |
| QCOM Sep 16th $145 call | out-of-money | 7/20.2022 | $11.75 | 9/16/22 | 11.75 | 8.73% | |