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Income Advisor
Conservative investing. Double-digit income.

August 11, 2021

The S&P 500 is at a new all-time high. While the market hasn’t been exciting compared to earlier this year, it’s clearly moving the right way.

It’s Another New High
The S&P 500 is at a new all-time high. While the market hasn’t been exciting compared to earlier this year, it’s clearly moving the right way.

The booming economy is currently winning the tug-o-war with growth fears, largely propelled by the Delta variant, and inflation fears. Earnings have been sensational. A higher percentage of S&P 500 companies have exceeded earnings expectation than ever before. And expectations were sky high.

Yeah, there are worries out there. The new virus strain will likely temper growth to some degree. Inflation could still be a problem. And markets tend to be cranky in September. But a booming economy with low interest rates and tons of federal spending on the way is hard to beat.

While growth is winning the day, cyclical stocks are still getting the shaft. The market still hates energy right now despite a likely booming second half. Financial stocks have also been hurt by the falling yield curve. The overdone pessimism may well correct itself in the months ahead.

There is opportunity in energy positions ONEOK (OKE) and Enterprise Product Partners (EPD). The rally in these stocks ended before they returned to fair value. But the recovery is forging on and these stocks should get another price surge when the current fears wane.

There’s also the yield curve trade. The 10-year Treasury rate fell from 1.75% in March to below 1.2% early this month. Companies that benefit from a steep yield curve, the difference between short- and long-term rates, have taken a hit, namely AGNC Investment Corp, (AGNC) and U.S. Bancorp (USB). But this yield curve fear is likely overblown. In fact, longer rates have been moving higher in the past couple of weeks.

The 10-year rate averaged between 2% and 3% before the pandemic. Now there’s a higher level of economic growth and activity, as well as persistent inflation. The dip in rates is silly. The 10-year benchmark and longer-term rates are likely to trend higher from here and AGNC and USB should benefit.

Trades this month
July 14
Sell BIP August 20 $55 calls at $2.00 or better - pending

July 16
DLR July 16 $155 calls at $8.00 – Expired
Digital Realty Trust stock (DLR) – Called at $155

July 28
Purchased One Liberty Properties, Inc. (OLP) - $30.37
Sell BIP August 20 $55 calls at $2.00 or better – Remove

Trade Alert: Sell NEE calls
Sell NEE September 17 $80 calls at $3.50 or better
Expiration date: September 17
Strike price: $80
Call price: $3.50

NextEra Energy, Inc. (NEE)
The combination utility and alternative energy company had a rare period of being out of favor earlier in the year. The normally up-trending juggernaut struggled while cyclical stocks became all the rage. I always regarded it as a short-term slump for a stock that should continue to deliver great returns. But the stock has been climbing back since June and got a big up move today. At the high since February, and ahead of an uncertain post-summer environment, it seems like a good time to sell a call and ring the income register. The calls are currently in-the-money as the stock is priced at 82.61 per share as of this writing.

Here are the three scenarios.
1. The stock closes above the $80 strike price at expiration
Call premium: $3.50
Dividends: $1.155 (3-15, 6-15, and 9-15)
Appreciation: $6.24 ($80.00 strike price minus $73.76 purchase price)
Total: $10.90 (total return will be 14.8% in seven months)

2. The stock price closes below our $80 strike price.
Call premium: $3.50
Dividends: $1.155
Total: $4.15 (total income return of 5.6% in seven months)

3. The stock price declines.
The decline will be offset by the $4.15 in income. Of course, the stock price is still likely to be above the original 73.76 per share purchase price.

Stock Portfolio Recap
AGNC Investment Corp. (AGNC) Yield 8.9%
The is primarily a yield curve story from here. This mortgage REIT primarily generates profits from the difference between long- and short-term interest rates. As the benchmark 10-year rate has fallen and the yield curve has flattened, AGNC’s price has dipped. But I believe the rate has fallen too far for the current booming economy and persistent inflation. The rate is likely headed higher from here, and AGNC should appreciate. The 10-year rate has been rising over the past couple of weeks and it may be just the beginning. BUY

Brookfield Infrastructure Partners (BIP) Yield 3.7%
Although revenue from Brookfield’s crucial infrastructure assets held steady during the pandemic and earnings grew, the partnership is getting a strong bounce back in the recovery. Overall funds from operations per share grew 18% in the second quarter. The transportation segment grew 36% and the utility segment was up 21%. Amidst the continued rebound, Brookfield also has the likelihood of the Inter Pipeline acquisition that could be a game changer in terms of earnings growth. The stock is close to the high but I want more. HOLD

Enterprise Product Partners (EPD) Yield 7.9%
Everything is solid for this midstream energy partnership. Business is rebounding sharply and should have a fantastic second half of the year. The dividend is rock solid and the stock price is dirt cheap. But the market continues to diss anything to do with energy in this particular phase. But things should change. Be patient. BUY

NextEra Energy Inc. (NEE) Yield 2.0%
This alternative energy utility stock is moving up a lot today. It’s up 3% on the day. There isn’t any company-specific information as of yet but the reason is likely a rotation into utility stocks, and NEE is among the most promising. NEE has been trending high since June as investors have been moving away from cyclicals into more defensive plays. While I love NEE longer term, I’m not sure this move away from cyclical stocks will last much past the summer. It’s a good time to write a covered call on NEE at the highest level since February and ahead of market uncertainty after Labor Day. HOLD

One Liberty Properties, Inc. (OLP) Yield 5.9%
Earnings for this diversified industrial REIT missed estimates last week. Funds from operations grew just slightly over last year’s quarter. But there was a good reason. The REIT sold two properties and has not yet redeployed the cash. That will change in future quarters and results were otherwise solid. We didn’t get the bump we hoped for but the stock is still trending higher. BUY

ONEOK, Inc. (OKE) Yield 7.1%
The midstream energy company reported earnings last week that beat expectations with 140% higher earnings per share than last year’s quarter. The company also raised guidance for 2021. Naturally, the market yawned. OKE has trended only slightly higher and has been moving lower in recent days. The market doesn’t like energy right now. But that should change. OKE sells at a great valuation with a safe and high dividend while business is rapidly improving. BUY

Qualcomm Corp. (QCOM) Yield 1.9%
The chip maker stock has been pulling back after the big bounce it got following its fabulous second-quarter earnings. The company is giving the market every reason to love the stock but this late-summer market just won’t bite. There is a good chance that after Labor Day when investors refocus 5G will be a bigger story in the market and QCOM will get going again. For now, it is still a good entry point for the stock if you don’t own it already. BUY

U.S. Bancorp (USB) Yield 3.3%
Like AGNC, this stock has been primarily a yield curve trade. The stock hasn’t had a lot of downside but has languished in recent months after a big run higher. The bank derives most of its profit from net interest income and the falling long rate has hurt the stock. But the 10-year has been rising in recent days, and so has USB. As I mentioned earlier, I expect the 10-year yield to continue trending higher over the rest of the year and USB should benefit. HOLD

Existing call trades
Sell AGNC August 20 $17 calls at $0.50 or better
The stock fell more than a dollar per share after we wrote the calls and the premium is currently at just $0.01 as the market deduces there is virtually zero chance AGNC closes above the 17 strike price in 10 days. The stock has been moving a little higher in recent days and I believe it will continue to do so. We will look to write more calls down the road and ring the register yet again.

Sell OKE August 20 $57.50 calls at $1.65 or better
These calls are far out-of-the-money as OKE is currently 5 per share below the strike price for options that expire in 10 days. That’s OK. We locked in a great income and will likely get a chance to write more as the stock likely trends higher over the rest of the year.

CIA STOCK PORTFOLIO
Open RecommendationsTicker SymbolEntry DateEntry PricePrice on
8/10/21
Buy at or
Under Price
YieldTotal Return
AGNC Investment Corp.AGNC01/13/2115.5216.1217.008.93%9.16%
Brookfield InfrastructureBIP01/13/2150.6354.9153.003.71%10.55%
NextEra Energy, inc.NEE2/24/2173.7680.5380.001.91%10.33%
Enterprise Product PartnersEPD3/17/2123.2122.7525.007.91%2.22%
U.S. BancorpUSB3/24/2153.4757.6755.003.19%9.47%
Qualcomm Inc.QCOM5/5/21134.65145.87140.001.86%8.88%
ONEOK, Inc.OKE5/26/2152.5152.7060.007.10%2.17%
One Liberty Properties, inc.OLP7/28/2130.3730.3933.005.92%0.07%
EXISTING CALL TRADES
Open RecommendationsTicker SymbolIntial
Action
Entry DateEntry
Price
Price on
8/10/21
Sell To Price
or Better
Total Return
AGNC Aug 20 $17 callAGNC210820C00017000Sell6/23/210.500.010.503.00%
OKE Aug 20 $57.50 callOKE210820C00057500Sell6/23/211.650.011.653.14%
NEE Sep 17 $80 callNEE210820C00080000Sell3.603.504.75%
SOLD STOCKS
SecurityTicker SymbolActionEntry DateEntry
Price
Sale DateSale PriceTotal Return
Innovative Industrial Props.IIPRCalled6/2/2087.829/18/20100.0015.08%
QualcommQCOMCalled6/24/2089.149/18/2095.007.30%
U.S. BancorpUSBCalled7/22/2036.269/18/2038.003.42%
Brookfield Infras. Ptnrs.BIPCalled6/24/2041.9210/16/2045.008.49%
Starbucks Corp.SBUXCalled8/26/2082.4110/16/2088.006.18%
Visa CorporationVCalled9/22/20200.5611/20/20200.000.00%
AbbVie Inc.ABBVCalled6/2/2091.0412/31/20100.0012.43%
Enterprise Prod. Prtnrs.EPDCalled6/24/2018.141/15/2120.0015.16%
Altria GroupMOCalled6/2/2039.661/15/2140.007.31%
U.S. BancorpUSBCalled11/25/2044.681/15/2145.001.66%
B&G Foods Inc,BGSCalled10/28/2026.792/19/2128.004.42%
Valero Energy Inc.VLOCalled8/26/2053.703/26/2160.0011.73%
Chevron Corp.CVXCalled12/23/2085.694/1/2196.0012.95%
KKR & Co.KKRCalled3/24/2147.986/18/2155.0014.92%
Digital Realty TrustDLRCalled1/27/21149.177/16/21155.005.50%
EXPIRED OPTIONS
SecurityIn/out moneySell DateSell PriceExp. Date$ ReturnTotal % Return
IIPR Jul 17 $95 callout-of money6/3/203.007/17/203.003.40%
MO Jul 31 $42 callout-of-money6/17/201.607/31/201.604.03%
ABBV Sep 18 $100 callout-of-money7/15/204.609/18/204.605.05%
IIPR Sep 18 $100 callin-the-money7/22/205.009/18/205.005.69%
QCOM Sep 18 $95 callin-the-money6/24/204.309/18/204.304.82%
USB Sep 18 $37.50 callin-the-money7/22/202.009/18/202.005.52%
BIP Oct 16 $45 callin-the-money9/2/201.9510/16/201.954.65%
SBUX Oct 16 $87.50 callin-the-money10/16/203.3010/16/203.304.00%
V Nov 20 $200 callin-the-money9/22/2010.0011/20/2010.004.99%
ABBV Dec 31 $100 callin-the-money11/18/203.3012/31/203.303.62%
EPD Jan 15 $20 callin-the-money11/23/200.801/15/210.804.41%
MO Jan 15 $40 callin-the-money11/25/201.901/15/211.904.79%
USB Jan 15 $45 callin-the-money11/25/202.001/15/212.004.48%
BGS Feb 19 $27.50 callin-the-money12/11/202.402/19/212.408.96%
VLO Mar 26 $60 callin-the-money2/10/216.503/26/216.5012.10%
CVX Apr 1 $95.50 callin-the-money2/19/214.304/1/214.305.02%
AGNC Jun 18 $17 callout-of-money4/13/210.506/18/210.503.21%
KKR Jun 18 $55 callin-the-money4/28/213.006/18/213.006.25%
USB Jun 16 $57.50 callout-of-money4/28/212.806/18/212.805.24%
DLR Jul 16 $155 callin-the-money6/16/218.007/16/218.005.36%