Let the Good Times Roll
November was quite a month in the market. It was one of the very best months for the market indexes in decades. The Dow was up 11.8%, the S&P 500 rose 10% and the Nasdaq gained another 11% in the month.
The main driver of the market rally is, of course, the vaccines. A vaccine means the end of the pandemic sooner rather than later. On the other side of the pandemic is a likely full and robust economic recovery. The market tends to look ahead about six months and it’s celebrating that recovery now.
But the market indexes don’t tell the best part of the story; they were high already. The new development is that the real economy sectors (like energy, finance and travel and leisure) which have been dogs all year are driving the market higher. And despite huge moves in those sectors over the past month, there is still a lot of room to run.
That’s great news for income investors. Beaten down stocks in energy and finance tend to pay strong dividends. Many of those stocks are still cheap and a long way from the pre pandemic prices. There are now an abundance of opportunities with high yields, great values and newfound momentum. The momentum is key for high call premiums.
In the past two weeks the portfolio has added a new stock, had one called away and written four new calls. Some of the previously dormant portfolio positions that pay high dividends are providing an opportunity to write well-priced calls and really boost our income.
As I outline below, certain stocks that have done nothing in terms of price appreciation since being added to the portfolio are still providing big income returns from the dividends and the covered calls. I expect more opportunities to be forthcoming in the weeks ahead. Keep an eye out for special alerts.
Stock Portfolio Recap
AbbVie Inc. (ABBV) Yield 5.0%
This stock is in an uptrend. I’m not sure how long it will last or how far the stock price will advance. The stock tends to rally, pull back, and rally again. Right now ABBV is in the midst of the third upward move since the summer of 2019. This move has already taken the stock to a recent high. It’s currently at 104.50. We wrote a call for January expiration with a 100 strike price. We’ll see what the stock does in the next six weeks. If the stock closes above 100 at expiration and gets called away, we will have gotten a 21% return on the holding, between the two calls and the dividends. If it closes below, I’m happy to hold the stock and write more calls in the future. HOLD
Altria (MO) Yield 8.5%
The cigarette maker stock hasn’t done anything since being added to the portfolio. It’s still within a buck of the original purchase price. But that hasn’t prevented this newsletter from milking it for a high income. A second call was recently written on the position. If the stock gets called away, we will get a 16.1% return since June. If it doesn’t get called, we’ll secure a 15.3% income return. Either way we win. And this is what the income strategy can do with a stock that goes nowhere, just by collecting the high dividends and writing calls. BUY
B&G Foods, Inc. (BGS) Yield 7.0%
The packaged food company stock is still on a sideways track. In November, the market saw it as a pandemic beneficiary and shunned it during the vaccine rallies. But it is actually a permanently improved company that will continue to flourish long after the pandemic. Despite moving 70% higher over the past year, it still sells at valuations below the five year averages. The huge yield is safe and it should have continuing strong earnings growth to drive the stock higher. The recent sluggishness has dampened the call premiums. But the stock will be back. BUY
Enterprise Product Partners (EPD) Yield 8.9%
This stock finally has solid upward momentum as the market embraces energy stocks in the wake of the vaccine. Operationally, the stock never deserved to be so beaten down. It’s coming back with the economy for sure. I don’t know what to expect from the stock in the near term, but it is highly likely to be a lot higher priced in six months. In the meantime, we wrote a call on the stock.
If the stock closes above the 20 strike price in January (currently 19.93), we will get a 19.6% return from the stock in less the 8 months. If not, we will lock in a 9.3% income return and write more calls in the future. While the stock price hasn’t done diddly since it was added to the portfolio in June, it is proving to be a great stock for income. HOLD
U.S. Bancorp (USB) Yield 3.9%
Arguably the best run bank in the county should certainly benefit in a full economic recovery. While the stock has already started moving higher, it should still have a long way to go. It’s still about half a buck below the 45 strike price for the January calls written. But we’ll see what happens in the next six weeks. We will lock in a solid income in a short time regardless of what the stock does in the near term. This stock should trend higher over the next six months and we might be able to milk it for income along the way.
Valero Energy (VLO) Yield 7.3%
This is a great refiner, one of the very best in the world. But right now it is a high leverage play on a vaccine and full recovery. VLO is already up over 50% since the first vaccine announcement. But it still has miles to go. Although the call premiums are quite juicy on this newfound market star, I’m waiting for more appreciation of the next few weeks. We’re splitting the energy bet by writing a call and taking the income on EPD and letting VLO ride for now. Go baby go. BUY
Existing Call Trades
Sell ABBV Dec 31 $100 call at $3.30 or higher
The stock has continued to trend higher since we wrote the calls. The stock price is over 104 and these calls are currently selling at 6.10, well above the 3.30 target price. As I mentioned above, the stock tends to spike higher and pull back on a longer term upward trend. There is a chance it finishes this latest up leg before the end of the month and the stock doesn’t get called. It that case we will have locked in an 11.3% income, between the two calls and the dividends since June. If it gets called, it will provide a 21% return. It is still worth writing the calls at the current price if you haven’t written them already, as the stock has a good chance of pulling back in the next four weeks.
Sell EPD Jan 15 $20 call at $0.80 or higher
These calls are currently selling at 0.92 and are still worth writing if you haven’t done so already. The huge dividends from that massive 9% yield along with a well priced covered call make this underperforming stock a beautiful income machine. If the stock closes above 20 at expiration and the stock gets called, it will provide a 19.6% return. If not, it will still provide a 9.3% income and the likely opportunity to write more calls and collect more dividends in the future.
Sell USB Jan 15 $45 call at $2.00 or higher
These calls are currently selling below the 2 target price at 1.68 as the stock has lost some momentum in the near term. The current call and the dividend will provide at 5.4% income in less than two months even if it gets called. We wrote calls on the stock earlier in the year and got an 8.9% on the stock then. We’ll see what happens in the next six weeks.
Sell MO Jan 15 $40 call at $1.90 or higher
The January calls are selling at 1.24, below the 1.90 target price. If the stock closes above the 40 strike price (currently 40.06) in six weeks, 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. This stock exemplifies what this income strategy can do even with a stock that goes nowhere.