Exploit the High Interest Rates
The rally sputtered. And it’s all about interest rates.
The market had a torrid rally for five straight months. The S&P 500 rallied over 27% between late October and the end of March. But the index has fallen over 5% in April as of the close last Friday. Last week was the worst week of the year for the market.
Of course, all rallies end eventually, even in raging bull markets. A pullback after five consecutive up months is normal and healthy in and of itself. But the story has also changed.
Investors had been factoring in falling interest rates and a soft landing. But now, investors are increasingly expecting no landing and continued high rates. Recent strong economic numbers, along with higher-than-expected inflation, are changing the perception. A strong economy is usually a good thing. But not if it brings sticky inflation and a more hawkish Fed.
The market has been digesting the interest rate disappointment. But I don’t think the situation is dire as long as we avoid the extremes. One extreme would be rising inflation and rising interest rates. The market likely expects rates to have peaked at a 5.5% Fed Funds rate and a 5% ten-year Treasury rate. A move beyond that could be problematic. The other extreme would be the economy falling toward a recession.
But those extremes appear unlikely over the course of the year. The market should be able to find a happy space in between, especially with the added benefit of the artificial intelligence catalyst.
That said, it looks like these high rates will stick around for a while. And most stocks don’t like high rates. But not all. There are some companies that actually thrive with higher interest rates. And that creates opportunity.
In this issue, I highlight a stock that pays a massive dividend generated by these high interest rates. As income investors, we can reap the bounty.
What to Do Now
The new higher interest rate expectation is not good for the REITs and utilities in the portfolio, including Alexandria Real Estate Equities (ARE), American Tower Corp. (AMT), Realty Income (O), Brookfield Infrastructure Corp. (BIPC), NextEra Energy (NEE), and Xcel Energy (XEL). These stocks have had a difficult two years and continue to bounce around with interest rate expectations.
But these stocks are already beaten to a pulp and have limited downside from here. They are higher yielding with more upside potential than downside risk and will present covered call writing opportunities in the months ahead. And that should be the case even if interest rates don’t move lower later in the year.
At the same time, new additions to the portfolio, including Main Street Capital Corp. (MAIN) and FS KKR Capital Corp (FSK) should benefit from the current higher interest rate situation. MAIN and FSK should have a shorter time frame to appreciate and create covered call opportunities.
It’s also a good time for technology. Calls expire on Qualcomm (QCOM) on Friday. The stock is currently well below the strike price because of a recent dip amid the market’s trouble. But QCOM should present another call opportunity in the months ahead. Also, the midstream energy companies, Enterprise Product Partners (EPD) and The Williams Companies (WMB) continue to pay huge dividends and thrive in the hot energy market.
Monthly Recap
March 26th
Purchased Main Street Capital Corporation (MAIN) – $46.40
March 28th
MPC March 28th $165 calls at $10.00 – Expired
Marathon Petroleum Corporation (MPC) stock – Called
April 23rd
Buy FS KKR Capital Corp (FSK)
Featured Action: FS KKR Capital Corp (FSK)
Yield: 14.4%
FS KKR is one of the largest publicly traded business development companies (BDCs). It focuses on loans to upper-middle-market U.S. companies, primarily in the form of senior secured debt at high rates of interest. The properties of BDCs were discussed more extensively in the March issue in the write-up for the recommendation of Main Street Capital Corp. (MAIN). I’ll summarize briefly.
As a BDC, FS KKR operates in the realm of private equity. Private equity is money provided to young and growing businesses that otherwise wouldn’t have access to sufficient capital. This money is typically lent at very high rates of interest and/or in exchange for equity stakes (a percentage of ownership).
Growing businesses with big ambitions need large amounts of capital in order to expand and grow to the next level. But such enterprises often have difficulty getting sizable enough loans from risk-averse banks, and they are too small to access the capital markets by issuing stocks or bonds. Thus, firms with the expertise to evaluate the risks can lend money at very favorable terms for themselves.
Middle-market companies are defined as those having annual revenues of between $10 million and $2.5 billion. FSK focuses on more established companies at the higher end of that range.
These smaller companies tend to be very cyclical. That can be good and bad. Smaller companies and BDCs typically do not perform well in an economic downturn. Right now, the economy looks solid and most institutions as well as the Federal Reserve Bank have raised their projections for GDP in 2024.
FSK is a BDC with ties to the parent company KKR & Co. (KKR) from which it can leverage the pseudo-drop-down opportunities. FSK is one of the larger BDCs and scale matters in private equity. BDCs are still a relatively obscure sector, but the biggest ones tend to get a lot more investor attention. It also further diversifies the portfolio and lowers the financing costs.
The BDC mostly makes high-interest loans to growing companies. It currently has a portfolio of 204 companies spread across 24 different industries. The concentration in the top 10 companies is 19%.
The loans are primarily senior secured debt (65.7% in the first quarter). Rising interest rates don’t bother the business at all because 89.3% of loans are floating rate and only 10.7% are fixed rate. Higher interest rates mean more income. The average loan rate FSK collects from its portfolio is 12.2% as of the end of the first quarter.
The Dividend
This security is all about the dividend. It pays a massive 14.4% yield at the current price. Therefore, the main question is how safe is this monstrosity of a payout.
The main reason to buy FSK is the high income it provides. BDCs are tax-advantaged securities. Because they provide a desirable function, funding the growth of rising companies, they pay no tax at the corporate level. BDCs typically pay higher dividends because money normally lost to taxes is paid out to shareholders.
It pays a quarterly dividend which was raised to $0.70 per share for the first dividend of 2023. That translates to $2.80 per share annually for a rate of 14.4% at the current price. But it has also paid a supplement dividend of $0.05 per share for the last four quarters and has declared it will continue to pay the supplement for the next two quarters. The next ex-dividend date is May 14.
FSK pays nearly all of its cash flow in dividends and has developed a solid track record of maintaining and raising the payout. The dividend was cut during the pandemic from $0.76 per share to $0.60. That was an extreme situation. But the company may have trouble maintaining that payout in a recession. In the first quarter, the dividend was covered 107% with net interest income. It has covered the last four dividends by an average rate of about 111%.
I have followed FSK for a while. In fact, it was held in this portfolio in 2021. It was held for a little less than six months and was called away after a call was sold. Between price appreciation, the dividends and the call premium, the position provided a total return of 17.67%. FSK has also provided a total return (including appreciation and dividends) of 43% over the past three years compared to a return of 26% for the S&P 500 over the same period.
I’m hopeful the position will provide great dividend income combined with covered call premiums in the quarters ahead.
FS KKR Capital Corp. (FSK)
Security type: Business Development Company (BDC)
Industry: Asset Management
Price: $19.39
52-week range: $17.50 - $20.99
Yield: 14.3%
Profile: FS KKR is one of the largest publicly traded BDCs that specializes in high-interest secured loans to middle-market U.S. companies.
Positives
- The size of the portfolio makes the stock more liquid and desirable to investors.
- It appears to be a good time in the economic cycle for smaller companies and BDCs.
- The massive yield should be maintainable in the year ahead.
Risks
- The stock will not hold up well in an economic downturn.
- Most other BDCs have a poor track record of performance.
FS KKR Capital Corp. (FSK)
Next ex-div date: May 14, 2024
Portfolio Recap
| Open Recommendations | Ticker Symbol | Entry Date | Entry Price | Recent Price | Buy at or Under Price | Yield | Total Return |
| Alexandria Real Estate Eq. | ARE | 12/19/23 | $129.54 | $115.69 | $140.00 | 4.39% | -8.91% |
| American Tower Corp. | AMT | 1/23/24 | $202.26 | $171.30 | $220.00 | 3.78% | -14.54% |
| Brookfield Infrstr. Cp. | BIPC | 2/27/24 | $32.64 | $30.87 | $40.00 | 5.25% | -6.79% |
| Enterprise Product Ptnrs. | EPD | 2/27/24 | $27.61 | $28.84 | $30.00 | 7.14% | 4.45% |
| Main Street Capital Corp. | MAIN | 3/26/24 | $46.40 | $47.62 | $50.00 | 6.05% | 3.15% |
| NextEra Energy, Inc. | NEE | 4/25/23 | $77.50 | $64.30 | $65.00 | 3.20% | -14.80% |
| Qualcomm Inc. | QCOM | 5/5/21 | $134.65 | $157.63 | $165.00 | 2.16% | 25.05% |
| Realty Income Corp. | O | 6/27/23 | $60.19 | $53.04 | $62.00 | 5.81% | -7.63% |
| The Williams Companies | WMB | 8/24/22 | $35.58 | $38.51 | $38.00 | 4.93% | 19.03% |
| Xcel Energy Inc. | XEL | 8/22/23 | $57.95 | $54.72 | NA | 4.00% | -2.92% |
| Call Trades | |||||||
| Open Recommendations | Ticker Symbol | Intial Action | Entry Date | Entry Price | Recent Price | Sell To Price or better | Total Return |
| QCOM Apr 26th $170 call | QCOM240426C00170000 | Sell | 3/12/24 | $10.00 | $0.14 | $10.00 | 7.43% |
| WMB May 17th $35 call | WMB240517C00035000 | Sell | 3/12/24 | $2.00 | $3.68 | $2.00 | 5.62% |
| as of close on 04/19/2024 | |||||||
| SOLD STOCKS | |||||||
| X | 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 | 15.08% |
| Qualcomm | QCOM | Called | 6/24/20 | $89.14 | 9/18/20 | $95 | 7.30% |
| U.S. Bancorp | USB | Called | 7/22/20 | $36.26 | 9/18/20 | $38 | 3.42% |
| Brookfield Infras. Ptnrs. | BIP | Called | 6/24/20 | $41.92 | 10/16/20 | $45 | 8.49% |
| Starbucks Corp. | SBUX | Called | 8/26/20 | $82.41 | 10/16/20 | $88 | 6.18% |
| Visa Corporation | V | Called | 9/22/20 | $200.56 | 11/20/20 | $200 | 0.00% |
| AbbVie Inc. | ABBV | Called | 6/2/20 | $91.04 | 12/31/20 | $100 | 12.43% |
| Enterprise Prod. Prtnrs. | EPD | Called | 6/24/20 | $18.14 | 1/15/21 | $20 | 15.16% |
| Altria Group | MO | Called | 6/2/20 | $39.66 | 1/15/21 | $40 | 7.31% |
| U.S. Bancorp | USB | Called | 11/25/20 | $44.68 | 1/15/21 | $45 | 1.66% |
| B&G Foods Inc, | BGS | Called | 10/28/20 | $26.79 | 2/19/21 | $28 | 4.42% |
| Valero Energy Inc. | VLO | Called | 8/26/20 | $53.70 | 3/26/21 | $60 | 11.73% |
| Chevron Corp. | CVX | Called | 12/23/20 | $85.69 | 4/1/21 | $96 | 12.95% |
| KKR & Co. | KKR | Called | 3/24/21 | $47.98 | 6/18/21 | $55 | 14.92% |
| Digital Realty Trust | DLR | Called | 1/27/21 | $149.17 | 7/16/21 | $155 | 5.50% |
| NextEra Energy, Inc. | NEE | Called | 2/24/21 | $73.76 | 9/17/21 | $80 | 10.00% |
| Brookfield Infras. Ptnrs. | BIP | Called | 1/13/21 | $50.63 | 10/15/21 | $55 | 11.65% |
| AGNC Investment Corp | AGNC | Sold | 1/13/21 | $15.52 | 1/19/22 | $15 | 5.92% |
| ONEOK, Inc. | OKE | Called | 5/26/21 | $52.51 | 2/18/22 | $60 | 19.62% |
| KKR & Co. | KKR | Sold | 8/25/21 | $64.52 | 2/23/22 | $58 | -9.73% |
| Valero Energy Inc. | VLO | Called | 11/17/21 | $73.45 | 2/25/22 | $83 | 15.53% |
| U.S Bancorp | USB | Sold | 3/24/21 | $53.47 | 4/13/22 | $51 | -1.59% |
| Enterprise Product Ptnrs | EPD | Called | 3/17/21 | $23.21 | 4/14/22 | $24 | 11.25% |
| FS KKR Capital Corp. | FSK | Called | 10/27/21 | $22.01 | 4/14/22 | $23 | 13.58% |
| Xcel Energy Inc. | XEL | Called | 10/12/21 | $63.00 | 5/20/22 | $70 | 12.66% |
| Innovative Industrial Props. | IIPR | Sold | 3/23/22 | $196.31 | 7/20/22 | $93 | -51.23% |
| One Liberty Properties | OLP | Sold | 7/28/21 | $30.37 | 8/24/22 | $25 | -12.94% |
| ONEOK, Inc. | OKE | Called | 5/25/22 | $65.14 | 1/20/23 | $65 | 2.66% |
| Xcel Energy, Inc. | XEL | Called | 10/26/22 | $62.57 | 1/20/23 | $65 | 4.67% |
| Realty Income Corp. | O | Called | 9/28/22 | $60.37 | 2/17/23 | $63 | 5.41% |
| Medical Properties Trust | MPW | Sold | 1/24/23 | $13.22 | 3/21/23 | $8 | -38.00% |
| Brookfield Infrastructure Cp. | BIPC | Called | 11/9/22 | $42.43 | 7/21/23 | $45 | 8.72% |
| Star Bulk Carriers Corp. | SBLK | Sold | 6/1/22 | $33.30 | 8/8/23 | $18 | -31.38% |
| Visa Inc. | V | Called | 12/22/21 | $217.16 | 8/18/23 | $235 | 9.16% |
| Global Ship Lease, Inc. | GSL | Sold | 2/23/22 | $24.96 | 8/29/23 | $19 | -13.82% |
| ONEOK, Inc. | OKE | Called | 3/28/23 | $60.98 | 9/15/23 | $65 | 9.72% |
| Hess Corporation | HES | Called | 6/6/23 | $132.25 | 10/20/23 | $155 | 17.87% |
| Tractor Supply Company | TSCO | Sold | 9/26/23 | $203.03 | 11/28/23 | $200 | -1.02% |
| Digital Realty Trust | DLR | Called | 7/18/23 | $117.31 | 1/19/24 | $135 | 17.16% |
| Intel Corporation | INTC | Called | 7/27/22 | $40.18 | 1/19/24 | $43 | 9.76% |
| AbbVie Inc. | ABBV | Called | 7/25/23 | $141.63 | 3/15/24 | $160 | 15.11% |
| Marathon Petroleum Corp. | MPC | Called | 10/24/23 | $149.45 | 3/28/24 | $165 | 12.06% |
| 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% | |
| AGNC Jun 18 $17 call | out-of-money | 4/13/21 | $0.50 | 6/18/21 | $0.50 | 3.21% | |
| KKR Jun 18 $55 call | in-the-money | 4/28/21 | $3.00 | 6/18/21 | $3.00 | 6.25% | |
| USB Jun 16 $57.50 call | out-of-money | 4/28/21 | $2.80 | 6/18/21 | $2.80 | 5.24% | |
| DLR Jul 16 $155 call | in-the-money | 6/16/21 | $8.00 | 7/16/21 | $8.00 | 5.36% | |
| AGNC Aug 20 $17 call | out-of-money | 6/23/21 | $0.50 | 8/20/21 | $0.50 | 3.00% | |
| OKE Aug 20 $57.50 call | out-of-money | 6/23/21 | $3.50 | 8/20/21 | $3.50 | 6.67% | |
| NEE Sep 17 $80 call | in-the-money | 8/11/21 | $3.50 | 9/17/21 | $3.50 | 4.75% | |
| BIP Oct 15 $55 call | in-the-money | 9/1/21 | $2.00 | 10/15/21 | $2.00 | 3.95% | |
| USB Nov 19 $60 call | out-of-money | 9/24/21 | $2.30 | 11/19/21 | $2.30 | 4.30% | |
| OKE Nov 26 $65 call | out-of-money | 10/20/21 | $2.25 | 11/26/21 | $2.25 | 4.28% | |
| KKR Dec 17 $75 call | out-of-money | 10/26/21 | $3.50 | 12/17/21 | $3.50 | 5.42% | |
| QCOM Jan 21 $185 Call | out-of-money | 11/30/21 | $9.65 | 1/21/22 | $9.65 | 7.17% | |
| OLP Feb 18 $35 Call | out-of-money | 11/19/21 | $1.50 | 2/18/22 | $1.50 | 4.94% | |
| OKE Feb 18 $60 Call | in-the-money | 1/5/22 | $2.75 | 2/18/22 | $2.75 | 5.24% | |
| USB Feb 25 $61 call | out-of-money | 1/13/22 | $2.50 | 2/25/22 | $2.50 | 4.68% | |
| VLO Feb 25 $83 call | in-the-money | 1/18/22 | $4.20 | 2/25/22 | $4.20 | 6.13% | |
| EPD Apr 14th $24 call | in-the-money | 3/2/22 | $1.25 | 4/14/22 | $1.25 | 5.69% | |
| FSK Apr 14th $22.50 call | in-the-money | 3/10/22 | $0.90 | 4/14/22 | $0.90 | 4.09% | |
| XEL May 20th $70 call | in-the-money | 3/30/22 | $3.00 | 5/20/22 | $3.00 | 4.76% | |
| SBLK July 15th $134 call | out-of-money | 6/1/22 | $1.60 | 7/15/22 | $1.60 | 4.80% | |
| OKE Oct 21st $65 call | out-of-money | 8/24/22 | $3.40 | 10/21/22 | $3.40 | 5.22% | |
| OKE Jan 20th $65 call | In-the-money | 11/25/22 | $3.70 | 1/20/23 | $3.70 | 5.68% | |
| XEL Jan 20th $65 call | in-the-money | 11/25/22 | $5.00 | 1/20/23 | $5.00 | 7.99% | |
| O Feb 17th $62.50 call | in-the-money | 12/28/22 | $3.00 | 2/17/23 | $3.00 | 4.97% | |
| QCOM Sep 16th $145 call | out-of-money | 7/20/22 | $11.75 | 9/16/22 | $11.75 | 8.73% | |
| V Mar 17th $220 call | out-of-money | 1/24/23 | $12.00 | 3/17/23 | $12.00 | 5.51% | |
| OKE May 19th $65 call | out-of-money | 4/11/23 | $2.70 | 5/19/23 | $2.70 | 4.43% | |
| V Jun 2 $230 call | out-of-money | 4/21/23 | $10.50 | 6/2/23 | $10.50 | 4.82% | |
| BIPC $45 July 21st call | in-the-money | 5/23/23 | $3.25 | 7/21/23 | $3.25 | 7.66% | |
| V $235 Aug 18th call | in-the-money | 7/11/23 | $9.00 | 8/18/23 | $9.00 | 4.13% | |
| GSL $20 Aug 18th call | out-of-money | 7/11/23 | $1.25 | 8/18/23 | $1.25 | 5.00% | |
| OKE $65 Sep 15 call | in-the-money | 9/15/23 | $3.20 | 7/25/23 | $3.20 | 4.92% | |
| INTC $35 Oct 20th call | out-of-money | 9/8/23 | $3.78 | 10/20/23 | $3.78 | 9.41% | |
| HES $155 Oct 20th call | in-the-money | 9/8/23 | $9.00 | 10/20/23 | $9.00 | 6.81% | |
| DLR $135 Jan 19th call | in-the-money | 11/22/23 | $6.00 | 1/19/24 | $6.00 | 5.11% | |
| INTC $42.50 Jan 19th call | in-the-money | 11/29/23 | $3.50 | 1/19/24 | $3.50 | 8.71% | |
| ABBV $160 Mar 15th call | in-the-money | 1/10/24 | $7.00 | 3/15/24 | $7.00 | 4.94% | |
| MPC $165 Mar 28th call | in-the-money | 2/14/23 | $10.00 | 3/28/24 | 10 | 6.69% | |
Alexandria Real Estate Equities, Inc. (ARE)
Yield: 4.4%
Things have turned ugly again for interest rate-sensitive stocks. This one-of-a-kind life science property REIT continues to be at the mercy of the latest interest rate thinking, along with most other conservative dividend stocks. Since the recent leg of interest rate consensus has been negative, ARE has taken a hit. But I’m generally positive going forward as interest rates, although appearing unlikely to fall as much as previously expected, have likely already peaked. ARE is a great income stock selling at the low end of historical valuations while the company is consistently growing revenues and profits from its niche properties. BUY
Alexandria Real Estate Equities, Inc. (ARE)
Next ex-div date: June 27, 2024, est.
American Tower Corporation (AMT)
Yield: 3.8%
AMT has had the same interest rate-related gyrations as ARE. And lately, that has been a bad thing. But the stock had been acting badly even before the interest rate consensus turned ugly after the company cut the dividend by 4.7% to focus on debt reduction. But the current dividend is still higher on a year-over-year basis. The reversal of the fourth-quarter hike is a headscratcher that shouldn’t affect the stock’s trajectory over the course of the year. The exposure to technology and a strong niche business haven’t insulated AMT from the souring interest rates story because of the dividend thing. But the company is still doing great business and earnings should reflect that and hopefully turn the stock around. BUY
American Tower Corporation (AMT)
Next ex-div date: July 11, 2024, est.
Brookfield Infrastructure Corp. (BIPC)
Yield: 5.2%
This is a great company with a great business that has a long track record of outperforming the market. But it has had a miserable two years. Although BIPC is well off the lows, it’s still much closer to the 52-week low than high. I will be patient with BIPC and other interest rate-sensitive stocks because attitudes about interest rates may be a low point for this year. The longer-term prognosis is still positive as rates have likely already peaked and Brookfield has some of the most defensive revenues possible and continues to deliver strong operational results. BUY
Brookfield Infrastructure Corporation (BIPC)
Next ex-div date: May 28, 2024, est.
Enterprise Product Partners L.P. (EPD)
Yield: 7.1%
This midstream energy juggernaut pulled back a little from the high in the recent market tumult but not much. The stock didn’t really go down so much as it just stopped making new highs. Energy stocks are still strong in a good economy and in a good position as a hedge against increased tensions in the Middle East, as that will likely raise the price of oil and the energy sector. But this month has been mostly about interest rates. Rising rates will hurt almost all stocks, but EPD has shown a lot more resilience than most. The company should deliver solid growth this year, and that massive distribution is extremely well supported. (This security generates a K1 form at tax time). BUY
Enterprise Product Partners L.P. (EPD)
Next ex-div date: April 29, 2024
Main Street Capital Corporation (MAIN)
Yield: 6.0%
The Business Development Company didn’t get hurt at all in the rough market. The stock isn’t interest rate sensitive because it has a higher yield, and its companies perform well in a strong economy. Although MAIN is currently selling near the 52-week high, it is still reasonably priced at less than 1.6 times book value, and most valuation measures are below the 5-year average. It has also shown resilience in the tough market over the last week. The safe and high yield pays dividends every single month with a strong possibility of supplemental dividends over the course of the year as well. BUY
Main Street Capital Corporation (MAIN)
Next ex-div date: May 7, 2024
NextEra Energy, Inc. (NEE)
Yield: 3.2%
As an interest rate-sensitive utility, you would think NEE is getting hammered this month. But it isn’t. NEE is actually higher for the month so far. That’s a good sign and indicates the stock is already beaten down with less downside than many other stocks at this point. NEE is still in a strong uptrend that began at the beginning of March. I suspect the worst is over for this stock. NEE had been a superstar performer before inflation and rising interest rates. It provides both safety from its best-in-class regulated utility business and growth from its considerable clean energy business. BUY
NextEra Energy, Inc. (NEE)
Next ex-div date: May 26, 2024, est.
Qualcomm Corp. (QCOM)
Yield: 2.2%
After rallying strongly since late October, QCOM has come down over the past couple of weeks and is now more than 10% below the high. Semiconductor stocks fell into correction territory, down 10% or more, this month on concerns about demand over the next several quarters. The chip sector can be very volatile from month to month and quarter to quarter as demand often fluctuates. But Qualcomm reports earnings in a couple of weeks and that will likely be the main determinant of the stocks’ near-term direction. The rest of the year is encouraging as Qualcomm is introducing new AI chips for PCs and smartphones and is well positioned for the next phase of the AI craze. BUY
Qualcomm Inc. (QCOM)
Next ex-div date: May 30, 2024m
Realty Income Corp. (O)
Yield: 5.8%
This legendary income stock is still floundering after a rough two years. But it has been going sideways since early February and not pulling back like many of its peers. Perhaps O has seen the worst also and is finally headed for better days. It is looking like O will be stuck in the mud until interest rates really move lower, which may or may not happen later this year. But the monthly dividend has been raised every year since 1969. The last two years have been among the worst in this stock’s history, which makes it dirt cheap ahead of an environment that will get better eventually. BUY
Realty Income Corporation (O)
Next ex-div date: April 30, 2024
The Williams Companies, Inc. (WMB)
Yield: 4.9%
Like EPD, this midstream energy company stock has been strong all year but a little weaker over the past week in sympathy with the overall market. WMB broke out in the middle of February and the latest pause may be only a temporary setback as the energy sector is still strong. It’s a stable, high-yield stock and the company should deliver solid and dependable earnings in just about any economy. Business remains solid and not dependent on commodity prices. It pays a well-supported dividend, and recent acquisitions and expansions ensure more solid growth going forward all the way out to 2028. BUY
The Williams Companies, Inc. (WMB)
Next ex-div date: June 6, 2024, est.
Xcel Energy Inc. (XEL)
Yield: 4.0%
The alternative energy utility has been slowly recovering from the price shock last month after it was reported that Xcel could be held liable for damages for the raging Texas wildfire. The scope of the damage is still not known. However, the company reports first-quarter earnings later this week and should provide better insight into the situation. NEE was downgraded to a HOLD until there is more clarity on the matter. The stock has certainly stabilized, and it is encouraging that XEL has continued to move slowly high even in a rotten market. HOLD
Xcel Energy Inc. (XEL)
Next ex-div date: June 14, 2024, est.
Existing Call Trades
Sell QCOM April 26th $170 calls at $10.00 or better
Time is about up and the stock price has fallen more than 10 per share below the strike price ahead of Friday’s expiration. The aggressive calls were written as the stock was near the 52-week high and looked toppy in the near term. Anything can happen, but it seems unlikely at this point that the shares will be called. We’ll get a great income no matter what and maybe have a chance to sell more calls on the stock before long.
Sell WMB May 17th $35 calls at $2.00 or better
Even WMB has been teetering a bit in this market environment. There are still more than three weeks to go before expiration, and anything can happen. If the market rolls over, we’ll keep a great stock and sell more calls later. If not, we secured a great income, and we still have EPD in the midstream energy space.
Income Calendar
Ex-Dividend Dates are in RED and italics. Dividend Payments Dates are in GREEN. Confirmed dates are in bold, all other dates are estimated. See the Guide to Cabot Income Advisor for an explanation of how dates are estimated.
The next Cabot Income Advisor issue will be published on May 28, 2024.
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