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Income Advisor
Conservative investing. Double-digit income.

February 10, 2021

This market looks like it never wants to stop going higher. The S&P 500 just made yet another in a long series of new all-time highs.

Energy Stocks Reignite
This market looks like it never wants to stop going higher. The S&P 500 just made yet another in a long series of new all-time highs.

Investors are banking on a full recovery later this year as the vaccine brings an end to the restrictions. I hope that happens (it better). There’s also trillions in stimulus and low interest rates. The market likes what it sees ahead.

Although a pullback is possible at anytime, and probably overdue after such a sharp run higher, the prospects for the rest of the year are bright. It’s also great news for income investors that high dividend paying stocks in sectors that took it on the chin during the pandemic have really come alive.

Energy stocks are on the move again. Crude oil prices rebounded to a 13-month high and the SPDR Energy Select Sector ETF (XLE) ran up 4.1% on Monday, capping seven straight days of price gains in the sector. The energy index has moved higher on all but one day so far in February. The sector had been moving sideways during a consolidation after a huge spike higher at the end of last year. But now it’s back.

The recent spike in energy stock prices, combined with the fact that the market may be getting a little ahead of itself in the near term, creates a good environment for writing calls. In this update, we highlight selling a call on refiner stock Valero Energy (VLO).

Trades this month
January 13th
Purchase AGNC Investment Corp. (AGNC) $15.52
Purchase Brookfield Infrastructure Partners (BIP) $50.63

January 15th
EPD Jan 15 $20 call at $0.80 – Expired
USB Jan 15 $45 call at $2.00 – Expired
MO Jan 15 $40 call at $1.90 – Expired
Enterprise Product Partners (EPD) stock – Called
U.S. Bancorp (USB) stock – Called
Altria (MO) stock – Called

January 27th
Purchase Digital Realty Trust (DLR) $149.17

February 10th
Sell VLO March 26 $60 call at $6.50 or better

Stock Portfolio Recap
AGNC Investment Corp. (AGNC) Yield 8.9%
This high-paying mortgage REIT continues to trend very slowly higher and just made a new post-pandemic high. The timing for the monthly paying income stock is right. The economy continues to improve as does the interest rate spread, from which it primarily derives profits. And the prospects look excellent going forward. The stock price is still well below pre-pandemic levels while the environment is shaping up to be better than the pre-pandemic one. BUY

B&G Foods, Inc. (BGS) Yield 5.7%
The stock price for this packaged food company has come back down fast and the “short squeeze” trading frenzy has abated. That said, the stock seems to be settling at a significantly higher level than it was trading before the shenanigans. It was a weird way for the market to discover there was value in this stock. We sold the calls at a lower strike price at a time when this stock couldn’t get out of its own way. Calls expire a week from Friday at a strike price of 27.50 (current price is 33.28). But we’ll still get a double-digit return in a short time. HOLD

Brookfield Infrastructure Partners (BIP) Yield 3.6%
This infrastructure partnership proved resilient during the pandemic as funds from operations grew 2.3% for 2020 and 11.3% in the fourth quarter. The stock continues on a slow and steady uptrend with things looking up for this year. Underperforming assets in the transportation and energy sector should rebound in a full recovery. Also, a $1 billion investment in new assets at the end of last year should boost earnings. The trend is strong and we will wait for a higher price to write calls. BUY

Chevron Corp. (CVX) Yield 5.7%
This best-in-class energy big shot has been on a sideways track since late November after rising sharply following the vaccine announcement. It’s a more conservative play on the sector and a lot less volatile than most energy stocks, especially VLO. It should continue to rise over the course of the year as the economy opens up but it has a lot less downside if the market pulls back in the near term. The stock is up over 7% since it was purchased in late December and I prefer to wait for a higher price to write the calls. BUY

Digital Realty Trust, Inc. (DLR) Yield 3.0%
This data center REIT tends to trade choppy and whenever it falls below the moving averages it tends to rebound strongly. One of those rebounds appears to be underway and should have more to go. It’s a solid REIT in a growth business that doesn’t stay cheap for very long. It moves independently of the overall market which can be annoying when the market is making new highs every day. But it’s a good stock to have in the portfolio with the market looking pricey. BUY

Valero Energy (VLO) Yield 7.0%
The refiner stock is looking strong of late. After going sideways for a while, it’s on the move again and just made a new post-pandemic high. Energy stocks are still undervalued and have come alive over the past week and a half as oil prices have trended higher. This stock has a lot of upside potential in the months ahead as it is a high-leverage play on a full recovery. With the near-term market direction questionable, we are taking the opportunity of the recent pop in VLO to write a call and lock in a high income. BUY

Existing Call Trades
Sell BGS February 19 $27.50 call at $2.40 or higher
The stock has settled in the low thirties for the time being in the aftermath of the trading frenzy that drove it into the high forties at one point. We missed that boat by writing the calls, but it was impossible to predict. But we’ll still get a double digit return whether the stock is called or not. We’ll see how the price moves in the next week before expiration.

Trade Alert: Sell VLO calls
Sell VLO March 26 $60 call at $6.50 or better
Expiration date: March 26th
Strike price: $60
Call price: $6.50

Valero Energy (VLO) has come back to life after a long sideways consolidation and is currently near a new post-vaccine high. I believe VLO will continue to climb higher over the course of this year as a full recovery emerges when the restrictions fade away. But the market is a little pricey here and due for a pullback.

We initially purchased VLO at a cheaper price ($53.70 versus the current $64.41) and can lock in a great income and return. Here are the three basic scenarios that will occur by expiration in six weeks.

  1. The stock goes above our $60 strike price.
  • Call premium: $6.50
  • Dividend: $0.98 (paid Dec. 9)
  • Dividend: $0.98 (pays Mar. 4)
  • Appreciation: $6.30 ($60 strike price minus $53.70 purchase price)
  • Total: $14.76 (total return will be 27.4% in seven months)
  1. The stock price closes below our $60 strike price.
  • Call premium: $6.50
  • Dividend: $0.98
  • Dividend: $0.98
  • Total: $8.46 (total income return of 15.7% in seven months)
  1. The stock price declines.

The decline will be offset by the $8.46 per share in income. But even if the stock closes below $60 per share on March 26th, it is less likely to fall below the initial purchase price of $53.70 and you should still have an unrealized gain on the stock.