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Income Advisor
Conservative investing. Double-digit income.

January 6, 2021

The major indexes had a down day on the first trading day of the year.

A Looming Risk
It’s a New Year! And the market started with a thud.

The major indexes had a down day on the first trading day of the year. There were a few reasons. One is that sobered up investors who stopped paying attention during the holidays took a more skeptical look at the market, especially one that has moved higher so quickly. There was also a spike in virus cases after the holidays.

But one issue is weighing heavier than the rest: the Georgia Senate runoff election.

Despite remaining uncertainties, the market had a huge rally the day after Election Day. It rallied because it anticipated a divided government, with Democrats retaining the House and Republicans holding on to the Senate. Dividend government means that draconian or game-changing legislation is highly unlikely. That risk was seemingly averted.

But today’s election determines two Senate seats. If Democrats win both, we will not have the dividend government that the market already priced in, as Democrats would control all three branches. Such an outcome could reverse the post-election relief rally. The S&P 500 has spiked more than 4% higher in the two months since the presidential election. The market could take that back and add downside with a feared outcome.

Healthcare stocks are particularly vulnerable to the risk because that sector had a huge relief rally after the election. Of course, it won’t have an impact in this portfolio because the only sector position, AbbVie Inc. (ABBV), was called away last week as the stock closed above the option strike price on expiration.

We’ll see how things turn out today. Either way, I’m optimistic for 2021 as the economy will likely move toward full recovery as the vaccines put the pandemic behind us. And it should be a great year for income as many high dividend-paying stocks will benefit as the shackles come off the economy.

Stock Portfolio Recap

AbbVie Inc. (ABBV) – Called
Our position in this large biopharmaceutical company was called away last Thursday on December 31 as the call options written on the position with a 100 strike price expired, with the price closing the day at 107.15. The total return for this portfolio position during its tenure in this portfolio (see below) was 21% in about seven months.

The stock price is at the high point of the recent pattern of forging to new highs and then pulling back. It remains to be seen if the stock will break the recent pattern and forge higher from here. If the stock pulls back, we can buy it back and do this all over again.

Altria (MO) Yield 8.4%
This is an unusual stock. On the one hand, it’s a great income play with a stratospheric and safe dividend yield. It also sells at a low valuation. That makes MO a great income stock. But the longer-term prognosis is questionable as the stock still remains in a longer-term downtrend. It probably won’t break truly higher until it proves it can replace falling smoking volumes with other sources of revenue.

The calls written on the stock have 10 days to go before expiration at a strike price of 40 per share (it’s currently at 40.84). This advisory has already written two calls on MO and collected three dividends. We will get strong 15% or 16% returns on the stock regardless of whether it gets called away on January 15 or not. HOLD

B&G Foods, Inc. (BGS) Yield 6.8%
The packaged food company has been pulling back in the last couple of weeks. After rising 16% in the first three weeks of December, it has given back almost all of the recent gains since. There is no apparent fundamental reason for the pullback at this point. And the stock still sells at an attractive valuation with a safe dividend, despite returning about 70% in 2020. But a near-term pullback was a strong possibility, which is why in-the-money and higher-priced calls were written on the stock. BUY

Chevron Corp. (CVX) Yield 6.1%
Despite the consolidation in the energy sector, CVX is up about a buck since being added to the portfolio two weeks ago. It’s the best of its peers. Chevron is the lowest cost producer and entered the recession with the strongest balance sheet. It can grow profits very quickly as the situation improves. The economy is sure to improve in 2021 as the vaccine is distributed and lockdown restrictions subside. CVX offers great value, a safe and high dividend, improving fundamentals and momentum as well. BUY

Enterprise Product Partners (EPD) Yield 9.2%
The big move up in this midstream energy giant during the vaccine euphoria has subsided. The stock has been moving slowly down from the recent high for more than three weeks now. But I don’t think it’s the end of the upside move, just the end of the beginning. EPD should be looking ahead to a very good 2021 as we get to the other side of this pandemic. But we used the high flying days to lock in a great income on the stock, which has since moved below the strike price of 20 for January 15 expiration. We’ll see what happens in the weeks ahead. BUY

U.S. Bancorp (USB) Yield 3.6%
The slow trend higher that has existed for the last two months continues. This is a great bank that is undervalued and pays a solid dividend. Profits are bound to improve this year as the economy improves. Banks also got a boost from being allowed to buy back shares again and USB already announced a $3 billion plan. Of course, the price could always bounce around in the near term depending on what the overall market does. It’s only a bit above the strike price for January 15 expiration. We’ll see what kind of mood the market is in over the next week or so. BUY

Valero Energy (VLO) Yield 7.0%
This refiner has a good chance to be a big star in the months ahead. It is very highly levered to a more full recovery, which I believe is likely to unfold in the quarters ahead. It had a huge move higher after the vaccine announcements but has since consolidated. Like with EPD, I believe recent behavior in the stock just marks the end of the beginning with a bigger move ahead. Of course, VLO can always get knocked around in the near term depending on the market. But the prevailing trend going forward should be higher. BUY

Existing Call Trades

Sell ABBV Dec 31 100 call at $3.30 – Expired and called
The stock was initially purchased in the portfolio on June 2, the date of our first issue. Since then, we have written two calls, collected two dividends and got about $9 of appreciation for a 21% total return in seven months.
Call premium: $3.30
Call premium $4.60 (exp. 9/18)
Dividend $1.18
Dividend $1.18
Appreciation: 8.96 ($100 strike price minus $91.04 purchase price)
Total: $19.22 (total return will be 21% in seven months)

Sell EPD Jan 15 20 call at $0.80 or higher
With only a week and a half to go before these calls expire, EPD is below the 20 strike price at 19.70 per share. The calls are below the target price at $0.29. While I’m optimistic about the performance of the stock over the next several months, there is a good chance it will close below the strike price on the 15th. That would be a positive scenario as we will be able to write more calls and collect more dividends on a stock that should trend higher.

Sell USB Jan 15 45 call at $2.00 or higher
Despite the fact that the shares have moved slightly above the strike price (currently 45.69 per share) the calls are still priced below the target level at $0.92. It’s a close one. We’ll see what the market does in the next 10 days. It could go either way by expiration but we will be in good shape with either scenario.

Sell MO Jan 15 40 call at $1.90 or higher
This one is coming down to the wire too. The stock is selling at just $0.80 above the target price with 10 days to go while the stock is trending downwards with support around the 40 per share level. Either scenario is a winner. If the stock isn’t called, we’ll have earned a 15% income return from the position. If it is called, we’ll have netted 16% and will close out the position.

Sell BGS February 19 27.50 call at $2.40 or higher
It’s looking like we played this one right. We wrote in-the-money calls at a lower strike price with a higher premium. The stock has since moved below the strike price. The calls and the dividend will provide a 10.25% income return if BGS closes below the strike price on expiration and a 13.5% return if it closes higher. But there is still a long way to go before February 19. We’ll see.