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Income Advisor
Conservative investing. Double-digit income.

September 16, 2020

It may seem unnecessary to write covered calls in a raging bull market. but that’s seldom the case. Over time you are likely to get a better return with this income strategy than just holding a market index. And you get a paycheck.

What to Make of Too Much Success

Things are good in this portfolio, maybe too good.

Several of the positions on which we wrote covered calls are trading above the strike price and are likely to be called away. IIPR, QCOM and USB have run well beyond the strike price on options expiration on Friday. They are certain to be called away. Other positions with calls that don’t expire for another month also have prices that have moved well beyond the strike price, including BIP and SBUX.

Such success begs a question: Why bother with this covered call nonsense if I could have gotten a better return just holding the stock? It’s important to take time out at this juncture to answer that quite reasonable question.

The design of this advisory is to get a double-digit annual income while preserving or growing principal. In order to extract a high double-digit income in a low-interest-rate world, it is necessary to sacrifice capital appreciation potential for income. That’s the nature of the beast. In most cases, writing calls on these positions will result in a double-digit income return in a short amount of time. You won’t go broke doing that.

It’s also worth noting that stock appreciation is unrealized until you actually sell the stock. Those gains can easily evaporate in a cranky market. You don’t get a better return until you take it. But call premiums and dividends collected are money in the bank.

Sure, in a market that’s up 20% or 30% per year you don’t need a strategy. You can just buy a market index and sell that year’s appreciation of income every year. But the market doesn’t go up like that every year, or even close to it. There are years when the market moves lower or it goes sideways for many years at a time.

It may seem unnecessary to write covered calls in a raging bull market. but that’s seldom the case. Over time you are likely to get a better return with this income strategy than just holding a market index. And you get a paycheck.

The strategy is working beautifully. If you followed our recommendations since this advisory debuted a few months ago, you are way ahead of schedule in getting a double-digit annual income return. But you will see even more value in markets that don’t go 60% higher in five months.

Stock Portfolio Recap

AbbVie Inc. (ABBV) Yield 5.2% — Okay, this stock is floundering a bit. After running up like crazy from the March bottom until mid-July, the stock has been in a funk. It got to a high of over 100 and is now just over 90. That’s okay. The stock still looks strong longer term. Plus, we took full advantage of the high price by writing a call near the high with a strike price of 100. We’ll keep the money and write more in the months ahead. BUY

Altria (MO) Yield 7.9% — The market despises this stock. But investors are going to continue to peck. The fact that the huge dividend is safe combined with the historically low price is an attractive proposition in these uncertain times. The stock has been in a slow-motion uptrend since May. I like this stock even more approaching the election risk when big tech is losing its mojo. I think investors will continue to gravitate towards this high dividend value stock in the months ahead. I will seize the opportunity to write another call as the situation unfolds. BUY

Brookfield Infrastructure Partners (BIP) Yield 4.4% — As the market rediscovers safe dividend stocks, BIP is a direct beneficiary. It has slowly forged higher for the entire market recovery while the overall market outpaced it. But now, it looks like BIP is the one kicking butt and taking names. This stock, with its safe and predictable revenues and future growth prospects, appears to be in the wheelhouse of an increasingly defensive market. BUY

Enterprise Product Partners (EPD) Yield 10.4%— I don’t know what to say. The fact that this stock offers incredible value doesn’t seem to matter. Even when the market changes personality, the new guy hates this stock too. It seems like waiting for the market to warm up to EPD is like waiting for the Great Pumpkin. But that double-digit yield is safe. At worst, this stock should be a great high-income play. You get a huge income while the market treats the stock like a red-headed stepchild. BUY

Innovative Industrial Properties (IIPR) Yield 3.6% — I love this stock. It is reaping the rewards of the torrid growth of legal marijuana. While other stocks in the sector struggle to turn a profit, Innovative continues to make money and generate obscene profits. Earnings are more than doubling every year. What price does such growth justify? The market seems to be saying “even higher” as IIPR rolls toward a new all-time high at 130. Unfortunately, we wrote calls with a 100 strike price. But we wrote two calls. And the total return on the investment in this advisory will be near 30% in a short amount of time even if the stock is called away. HOLD

Qualcomm inc. (QCOM) Yield 2.4% — This is a new stock. When it was purchased in the portfolio it was a company poised ahead of an earnings and revenue boom as 5G smartphones roll out later this year and next. Now, with the Huawei settlement, it’s a company that is killing it already ahead of the earnings bonanza. While it is almost certain to be called away at the end of the week at 95, it still provided a double-digit income in just a few months. HOLD

Starbucks (SBUX) Yield 1.9% — This coffee house stock is a beautiful pick. Despite being in the restaurant business in the midst of a pandemic, it has held up very well because of brilliant adjustments in deliveries and drive-through service. It will also bounce back at warp speed as the lockdowns ease. The calls written on this stock at the end of last month appear to be well timed. We got a huge premium that will lock in a fabulous income return in a short time. BUY

U.S. Bancorp (USB) Yield 4.6% — This market hates bank stocks almost as much as it hates energy stocks. But that hasn’t stopped this pick. It is still one of the very best banks in the country with a dirt-cheap price and a great dividend. The market is warming to USB while still giving its loser peers the cold shoulder. USB is currently about a dollar above the strike price and might be called away at expiration on Friday. That’s okay. We plucked a winner out of the financial sector debris and garnered a high income return in a short time. BUY

Valero Energy (VLO) Yield 8.0% — I think the market is missing this one. On the one hand, the market is pricing in a robust recovery in the quarters ahead. And on the other hand, it continues to shun this direct beneficiary of the very recovery it’s banking on. Time will tell. But I’ll bet this stock gets hot as the recovery gains traction. For now, we’ll just have to sit with it and collect the dividend while the stock wallows. But I will pounce on the opportunity to write a highly profitable call as it moves towards its true destiny. BUY

Existing Call Trades

QCOM September 18 95 call at $4.30
The call we wrote on this stock expires on Friday at a strike price of 95. The stock is trading at 116. It was great while it lasted but this stock is sure to be called away. That’s fine. This advisory is designed to trade potential capital appreciation for high income. And we got that high income. The pursuit of high income will result in many positions being called away. That’s the nature of the beast. But the strategy is working by delivering a high income while growing your principal.

ABBV September 18 100 call at $4.60
This looks like a stock we will surely keep as the calls expire on Friday with a strike price of 100, and ABBV is currently trading at 90.78. The timing was great. The stuttering stock performance is quite normal after a huge run higher. Meanwhile. AbbVie has got it going on and it should resume its run higher in the months ahead. We will write another call and ring the register again.

USB September 18 37.50 call at $2.00
USB is trading at 38.33 with a strike price of 37.50 on calls that expire on Friday. We’ll see if the price holds and it gets called away. Either way we win. If it gets called away, we extracted a high income from a rare player in the beleaguered financial sector in a short amount of time. If we keep the stock, we’ll write more calls and get more income down the road.

IIPR September 18 100 call at $5.00
I’m going to miss this high-flying marijuana stud. At a price of over 128 with a strike price of 100 on calls that expire Friday, IIPR is certain to be called away. But remember, this advisory wrote two calls on this stock before it ran away. Between the calls written, the dividend collected, and the capital appreciation, we got a better than 25% income return in a little over three months. You’ll never go broke doing that.

Sell SBUX October 16 87.50 call at $3.30
This is yet another position that is doing too well for its own good. We got a HUGE call premium on this baby. The above $3.30 target price proved way too modest. If you acted on the recommendation when the issue came out you probably got $4, or even $5. The stock is about a dollar in the money with a month to go until expiration. We’ll see what happens.

Sell BIP October 16 45 call at $1.95 or higher
I think this stock is running away. Sure, it’s about $3 in the money with a month to go until expiration and it could certainly come back down. But I think investors are warming to this kind of defensive dividend stock ahead of the election uncertainty. It’s fine if the stock is called away. We will have used it for a double-digit income in a short time.