The Sideways Market
Not much has changed in the market over the last week. The S&P 500 did manage to climb to a new all-time high yesterday. But that high was only a fraction of a percent above the high of early May. The market really hasn’t gone anywhere in six weeks.
It’s a period of offsets for the market. The excitement of a booming recovery is offset by the fact that the market is looking six months ahead to the end of the year when growth is slowing. High inflation numbers are offset by the fact that things like housing, retail sales and interest rates are cooling off.
Higher inflation will likely last for several more months. But the Fed says it should be “transitory,” and fade as the economy normalizes. The market cares a great deal about what the Fed thinks because it wants the Fed to keep short-term rates where they are and continue its bond buying program for longer.
For now, investors don’t seem to have anything to be overly excited or dejected about. The sideways market is benefiting dividend stocks as investors look towards income and value in the absence of rising stock prices.
Portfolio positions including Brookfield Infrastructure Partners (BIP), Digital Realty (DLR), Enterprise Product Partners (EPD) and ONEOK (OKE) have all made new 52-week highs over the past week. Just about all of these stocks are dividend payers that had lagged the overall market through most of the recovery.
The sideways direction of stocks is not good for covered call premiums, as fewer investors are willing to bet on higher prices. We have a situation where several portfolio positions are rising to new highs but still aren’t generating generous call premiums.
At this point, it makes sense to hold off on writing calls on most of the positions, because the premiums are lousy and there is a good chance the stock prices will keep climbing. However, one stock, Digital Realty Trust (DLR), does offer a decent opportunity at current prices.
Trades this month
May 26
Buy ONEOK stock (OKE) - $52.51
June 15
Sell DLR July 16 $155 calls at $8.00 or better
Trade Alert: Sell DLR calls
Sell DLR July 16 $155 calls at $8.00 or better
Expiration date: July 16
Strike price: $155.00
Call price: $8.00
Digital Realty Trust (DLR)
This data center REIT operates in a growth niche. The stock moves independently of the overall market and just made a new all-time high. This is not a good market for covered calls, but the timing is right for DLR, as there is a good chance it will encounter resistance near this price. We’re forcing the issue by writing in-the-money calls to get a high premium. The target price is also above what you can get today. But there is a good chance the calls will hit that price over the next week.
Here are the three basic scenarios.
1. The stock closes above the 155 strike price at expiration.
Call premium: $8.00
Dividend: $1.16 (paid March 31)
Dividend: $1.16 (payable June 30)
Appreciation: $5.83 ($155 strike price minus $149.17 purchase price)- Total: $16.15 (total return will be 10.8% in six months)
2. The stock price closes below our 155 strike price.
Call premium: $8.00
Dividend: $1.16 (paid March 31st)
Dividend: $1.16 (payable June 30th)- Total: $10.32 (total income return of 7.3% in six months)
- 3. The stock price declines.
The decline will be offset by the $10.32 in income. Of course, there is some leeway to work with since the purchase price was $5.83 per share below the strike price.
Stock Portfolio Recap
AGNC Investment Corp. (AGNC) Yield 8.2%
The mortgage REIT suffered a big pullback last week after forging relentlessly higher for months. It was down over 5% in one day after the company revealed that it is filing for a stock offering and announced a book value per share that was 6.4% below what it reported last time. Although it has not announced a stock offering yet, such issuances tend to dilute existing shares. The book value decrease included market fluctuations as well as the payment of the last monthly dividend, which investors may have been disappointed did not increase. The stock has since stabilized and still looks OK from here. HOLD
Brookfield Infrastructure Partners (BIP) Yield 3.8%
The infrastructure partnership recently made a new all-time high. The stock is trending in the right direction and should benefit as infrastructure investment becomes more popular with the current administration’s proposals. But BIP is in a bidding war with Canadian midstream company Pembina Pipeline (PBA) for Canadian oil infrastructure company Inter Pipeline (IPL). Acquiring IPL could be a needle-mover and the stock may bounce around a bit as news on this acquisition comes out. BUY
Digital Realty Trust, Inc. (DLR) Yield 2.9%
DLR has come alive again since the beginning of March and just made a new all-time high. The stock may continue to forge higher because it has growing and reliable earnings. However, the stock does have a pattern of making new highs and then pulling back for a while. It’s at a level where it’s advantageous to write a call and lock in a high income. HOLD
Enterprise Product Partners (EPD) Yield: 7.1%
I like the way this midstream energy partnership looks right now. It’s returned over 30% YTD and is making a series of post-pandemic highs. Yet, it is still far below the pre-pandemic price and very far from the all-time high. The sideways market is attracting more dividend investors and EPD not only pays a huge yield but sells at a compelling value. I expect EPD to continue to trend slowly higher over the rest of the year. BUY
KKR & Co. (KKR) Yield: 1.0%
After a big run-up from late January until early May, KKR has been stuck in the mud since. That’s OK. It had to consolidate at some point. I still like the stock’s prospects for the rest of this year. It’s a very friendly environment for asset managers as the economy booms. We also may have timed the calls just right. The stock is slightly below the 50 per share strike price with expiration coming in just two days. We may be able to keep the stock and write more calls in the future when the stock likely trends higher again. HOLD
NextEra Energy Inc, (NEE) Yield 2.1%
This combination alternative energy utility stock can’t get out of its own way lately. The company may own the future, but it doesn’t seem to own the present. The recent bout of weakness is a rare departure from the normal uptrend, and it’s happening ahead of a very promising environment for alternative energy stocks. Washington will likely not only offer tax breaks and other goodies but should make the sector stand out to investors. BUY
ONEOK, Inc. (OKE) Yield 6.7%
Much of what I said about fellow midstream energy company EPD is true for OKE. The stock made a new post-pandemic high on Monday after trending higher since the vaccine announcements in November. But OKE is still more than 25% below the pre-pandemic high ahead of a business environment that is likely to be better. This is still a cheap stock with a massive dividend and it also has strong momentum. BUY
Qualcomm (QCOM) Yield 2.0%
After returning 77% in 2020, QCOM is down about 10% YTD. Sector struggles have no doubt factored into recent performance. But the company itself is doing great. Recent earnings were phenomenal as Qualcomm is a huge beneficiary of the 5G rollout, as the company earns royalties in its 5G smartphone chip. The good times should last a while. In the meantime, QCOM sells at just 16 times earnings ahead of 5G becoming a bigger story in the market after the pandemic. QCOM could bounce around for a while longer but it could be a big winner the rest of the year. BUY
U.S. Bancorp (USB) Yield 2.8%
This best-in-class regional bank stock ran out of gas in early May and has pulled back since. After a steep run higher for several months, this consolidation is healthy. I still like the prospects for the stock over the rest of the year as the economy booms. The calls written in the portfolio expire on Friday at less than a dollar below the current price. There is still an outside chance the stock won’t be called. HOLD
Existing call trades
Sell AGNC June 18 $17 call at $0.50
The stock continue to be under pressure due to a slowing housing market and higher prepayments amidst still low interest rates. The stock has pulled back considerably over the past week but is still unlikely to reach the strike price of 17 per share by Friday. Shares are highly likely to be called at that time.
Sell KKR June 18 $55 calls at $3.00
It’s a horse race until Friday expiration. The stock has fallen below the 55 per share strike price with two days to go. We are set up for a better than 20% total return if the shares are called. But if they aren’t, we’ll still lock in a high income and continue to own a stock with bright prospects the rest of the year.
Sell USB June 18 $57.50 calls at $2.80
USB is only pennies above the strike price with two days before expiration. We’ll see what happens. If it doesn’t get called, I’m happy to continue holding it in the months ahead. But either way, we’re set up to get a high income and/or total return.
| CIA STOCK PORTFOLIO | |||||||
| Open Recommendations | Ticker Symbol | Entry Date | Entry Price | Price on 6/14/21 | Buy at or Under Price | Yield | Total Return |
| AGNC Investment Corp. | AGNC | 01/13/21 | 15.52 | 17.63 | 17.00 | 8.17% | 17.67% |
| Brookfield Infrastructure | BIP | 01/13/21 | 50.63 | 54.30 | 53.00 | 3.76% | 9.32% |
| Digital Realty Trust | DLR | 1/27/21 | 149.17 | 162.33 | 155.00 | 2.86% | 10.55% |
| NextEra Energy, inc. | NEE | 2/24/21 | 73.76 | 73.31 | 80.00 | 2.10% | 0.44% |
| Enterprise Product Partners | EPD | 3/17/21 | 23.21 | 25.32 | 25.00 | 7.11% | 11.57% |
| U.S. Bancorp | USB | 3/24/21 | 53.47 | 58.16 | 55.00 | 2.89% | 9.59% |
| KKR & Co. | KKR | 3/24/21 | 47.98 | 55.29 | 50.00 | 1.05% | 15.53% |
| Qualcomm Inc. | QCOM | 5/5/21 | 134.65 | 137.31 | 140.00 | 2.02% | 2.49% |
| ONEOK, Inc. | OKE | 5/26/21 | 52.51 | 55.44 | 60.00 | 6.75% | 5.58% |
| EXISTING CALL TRADES | |||||||
| Open Recommendations | Ticker Symbol | Intial Action | Entry Date | Price on 6/8/21 | Recent Price | Buy Under or | Total Return |
| AGNC June 18 $17 call | AGNC210618C0017000 | Sell | 4/13/21 | 0.50 | 0.62 | 0.50 | 3.20% |
| KKR June 18 $55 call | KKR210618C00055000 | Sell | 4/28/21 | 3.00 | 0.75 | 2.50 | 6.25% |
| USB June 18 $57.50 call | USB210618C00057500 | Sell | 4/28/21 | 2.80 | 0.84 | 2.50 | 5.24% |
| 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 | 38.00 | 3.42% |
| Brookfield Infras. Ptnrs. | BIP | Called | 6/24/20 | 41.92 | 10/16/20 | 45.00 | 8.49% |
| Starbucks Corp. | SBUX | Called | 8/26/20 | 82.41 | 10/16/20 | 88.00 | 6.18% |
| Visa Corporation | V | Called | 9/22/20 | 200.56 | 11/20/20 | 200.00 | 0.00% |
| AbbVie Inc. | ABBV | Called | 6/2/20 | 91.04 | 12/31/20 | 100.00 | 12.43% |
| Enterprise Prod. Prtnrs. | EPD | Called | 6/24/20 | 18.14 | 1/15/21 | 20.00 | 15.16% |
| Altria Group | MO | Called | 6/2/20 | 39.66 | 1/15/21 | 40.00 | 7.31% |
| U.S. Bancorp | USB | Called | 11/25/20 | 44.68 | 1/15/21 | 45.00 | 1.66% |
| B&G Foods Inc, | BGS | Called | 10/28/20 | 26.79 | 2/19/21 | 28.00 | 4.42% |
| Valero Energy Inc. | VLO | Called | 8/26/20 | 53.70 | 3/26/21 | 60.00 | 11.73% |
| Chevron Corp. | CVX | Called | 12/23/20 | 85.69 | 4/1/21 | 96.00 | 12.95% |
| 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% | |