Note: Due to the Labor Day market holiday next Monday, you will receive your next Cabot Income Advisor update on Wednesday, September 4.
Cash in on the New Electricity Boom
After a rough start to the month, the market is soaring again. The S&P already made up for all of the recent decline and is back to within a whisker of the all-time high. All that recession talk is gone, and everything looks great again, for now.
Although the rally has broadened out recently, technology has driven this market higher year to date and for the past year and beyond. The sector is being propelled by artificial intelligence (AI), which will continue to be a powerful catalyst for years to come.
AI is the next level of technology where computers think for themselves and will usher in self-driving cars, robots, smart cities and much more. It’s exciting and sexy stuff. But this latest innovation is only made possible by existing technology. In fact, the development of AI is not possible without a very old technology that was all the rage about 130 years ago – electricity.
AI requires major energy-guzzling components to make it work. These components are housed in data centers. These places are specialized facilities used to house computer systems and related components. They have sophisticated temperature control systems, integrated fire suppression, redundant data communications connections, and backup power systems. Large data centers use as much electricity as a small town.
But that was before AI. AI systems require an estimated seven times as much electricity as traditional data center systems. To accommodate AI, it is estimated that major tech companies will invest $1 trillion in data centers over the next five years. That’ll burn a lot of electricity. And it’s not just data centers.
Electric vehicles (EVs) will also require massive amounts of additional electric power for infrastructure and charging stations. The EV fleet is growing, and the additional power demand will be massive. In addition, new manufacturing including the planned semiconductor factories in this country will also suck huge resources from the grid.
The current level of electricity generation in this country cannot accommodate the massive onslaught of new technologies that lies ahead.
After nearly two decades of stagnant growth, electricity demand is expected to soar in the years ahead. This year alone, electricity demand is growing 81% more than it did last year. Electricity demand is expected to grow at nearly twice the past rate for the rest of this decade.
New capacity will have to be added to the grid. But that takes time. Meanwhile, electricity prices are soaring and will likely continue to do so for a while. It makes previously stodgy electricity generators growth investments. Judging from recent expansions in production, most of the increasing demand is likely to be accommodated by sources that generate power from renewable sources.
Most of the increasing electricity demand (from data centers, EVs, and chip manufacturing) is coming from climate-conscious technology companies. They have carbon mandates and are looking to secure power sources for the long term, where these mandates really take effect. It is highly likely that these tech companies will try to secure carbon-friendly power sources whenever possible.
Companies that can provide low-carbon electricity generation should be the primary beneficiaries of this increasing electricity demand. Opportunity is being created for certain companies that also tend to be very recession-resistant at a time when the economy is slowing. But there is one utility that stands above all others in terms of the current opportunity. And it is highlighted below.
What to Do Now
It’s hard to defy this market. Regardless of high interest rates, war, and political turmoil, the rally just keeps forging ahead. Sure, there’s an ugly week or so every three or four months, but the market brushes it off in short order.
I believe the market will be higher than it is now by the end of the year. But volatility is likely to increase because there are some reasons for concern. Although a recession does not appear imminent, it’s on the radar now. Bad economic numbers may spook investors going forward.
The market is high and has shown vulnerability to headline risk. And headline risk should accelerate in the months ahead with these wars going on and the election coming up. It’s also September, historically the worst month of the year for stocks, followed by October.
Meanwhile, defensive stocks are making a huge comeback. Utilities and REITs tend to be interest rate sensitive and had a rough couple of years with inflation and rising interest rates. But rates are declining in a significant way, and the Fed is highly likely to start cutting the Fed Funds rate in September. The reason for the decline is reversing and these sectors are on the move. In addition, many of these same stocks have defensive businesses and the relative performance is strong in a slowing economy.
These defensive stocks are still cheap and high yielding and now have momentum. The best buys right now in the portfolio include Alexandria Real Estate Equities (ARE), American Tower (AMT), Brookfield Infrastructure Corp. (BIPC), NextEra Energy (NEE), and Realty Income (O). These stocks should perform well regardless of how the recession threat plays out.
Monthly Recap
July 30
Sold AMT Sep 20th $210 calls at $15.00 or better
August 6
FS KKR Capital Corporation (FSK) – Rating change “BUY” to “HOLD”
Main Street Capital Corporation (MAIN) – Rating change “BUY” to “HOLD”
August 27
Buy Constellation Energy Corporation (CEG)
Sell OKE Oct 18th $87.50 calls at $3.50 or better
Featured Actions
Buy Constellation Energy Corporation (CEG)
Baltimore-based Constellation Energy is the largest nuclear power operator in the U.S. and the nation’s largest producer of carbon-free energy. It is an unregulated utility that supplies electric power to more than 20 million homes and businesses across the county. A diverse mix of hydro, wind, and solar paired with its industry-leading 21 nuclear reactors produce energy output that is 90% carbon-free.
Three-quarters of Fortune 100 companies rely on Constellation for electric power. The company has 22.1 gigawatts (GW) of nuclear capacity compared to just 6.3 GW from its closest competitor. It operates more than a fifth of all the nuclear capacity in the country. Constellation also currently produces 10% of carbon-free power in the United States.
The nuclear aspect is a huge deal that sets Constellation apart. You may have reservations because you saw Chernobyl on Max or you remember Three Mile Island. But technology is far superior today and nuclear energy is highly safe and reliable. And constellation is ranked number one in terms of operational metrics among major nuclear generators. In fact, nuclear energy is one of the few areas today that enjoys bipartisan political support.
The reliability factor is huge along with the fact that it is clean energy. There are a massive number of carbon mandates and probably a lot more on the way as the government enacts legislation to address climate change. The problem is that clean energy alternatives to fossil fuels simply are not that feasible and reliable on a massive scale.
Nuclear provides the carbon-free benefits of solar and wind but it is also completely reliable 24/7 for 365 days per year. Companies can secure a power source that meets their carbon mandates long term while also not sacrificing any reliability. Nuclear is a highly reliable power source that functions without fail even when the wind stops blowing and it’s raining outside.
This has not escaped the eye of climate-conscious big tech companies in securing energy sources for their data centers. And major tech companies are expected to invest $1 trillion in data centers over the next five years.
Reliability is crucial for data centers and the seamless operation of the technology that defines these companies. These companies also think long term when locking up reliable power sources and achieving their carbon goals. As is logical, big tech companies are zeroing in on nuclear power plants for their massive data center expansions that offer the only combination of both carbon-free and reliable.
With power demand from data centers expected to more than double by 2030, big tech is looking to make collocation deals with nuclear power facilities, whereby data centers are located next to nuclear power plants. In fact, the Constellation CEO has recently said the company is in “deep discussions” with several technology companies for such arrangements. A major source of electricity growth in the next few years is specifically targeting nuclear, and Constellation is king.
Constellation is forecasting average annual base earnings growth of 10% through 2028. But actual earnings growth should be much higher. The base growth doesn’t include enhanced earnings, which benefit from higher power prices and additional business acquired. And that’s where the real growth is over the next several years.
Constellation has only been operating independently with its own stock since 2022 when it was spun off from parent company and utility giant Exelon Corporation (EXC). Since the January 19, 2022, IPO, CEG has returned 377% compared to a return of just 29% for the S&P 500 over the same period. A key to Constellation’s stock performance is that, unlike most utilities, it’s not regulated. It’s free to sell its power wherever it chooses, and the government doesn’t set the rates.
Likely rising power rates is also a key aspect of future growth. Demand well exceeds supply currently. In the PJM region, current demand for renewable power generation supply is 25 mw per rolling 30-day average while the demand is 90 mw. And those numbers are before the anticipated spike in demand that lies ahead.
The current dividend is small at an annual rate of $1.41 per share, which translates into a 0.78% yield at the current price. But the dividend has already grown 150% over the first two years of independence and the company is targeting 10% annual payout growth over the next several years. There is room for growth as the payout ratio is currently less than 17%.
Companies that grow the dividend consistently tend to be among the best-performing stocks on the market over time. Constellation also has investment-grade credit ratings and is shareholder friendly. It has so far completed $2 billion in share repurchases and has another $1 billion left on the current program.
It’s a great time for an investment in CEG. Not only is the company poised in front of a huge growth spurt in electricity demand, which will be even higher for clean energy, but it is in one of the most defensive industries at a time when the economy is slowing, possibly toward a recession. Power demand remains consistent regardless of the state of the economy. CEG provides an often sought but seldom-found combination of both defense and growth.
CEG pays a rather lame dividend, with a current 0.72% yield. But the stock generates huge call premiums and we should be able to more than make up for the lack of dividend income.
Constellation Energy Corporation (CEG)
Security type: Common Stock
Sector: Utility (electric)
Price: $195
52-week range: $102.40 - $236.30
Yield: 0.72%
Profile: Constellation is the largest nuclear power operator in the U.S.
Positives
- Electricity demand is growing rapidly because of AI, EVs, and growing manufacturing.
- Nuclear is the most reliable source of clean energy desired by big tech companies.
- Constellation is an unregulated utility with more earnings upside in a highly defensive industry.
Risks
- There is always an outside chance of a nuclear accident.
- Government can impose restrictive regulations.
Sell OKE Oct 18th $87.50 calls at $3.50 or better
Expiration date: October 18th
Strike price: $87.50
Call price: $3.50
ONEOK, Inc. (OKE)
OKE has been by far the best stock in this portfolio’s history for selling covered calls. The position was held on three other occasions and was eventually called each time. But during those tenures, a total of seven calls were sold for total premiums of $21.50. The stock price just hit a new high as we head into uncertain months ahead. It’s prudent to secure a high income while the market is still riding high.
Here are the three scenarios.
1. The stock closes above the $87.50 strike price at expiration.
Call premium: $3.50
Dividends: $0.99
Appreciation: $7.91 ($87.50 strike price minus $79.59 purchase price)
Total: $12.40 (total return will be 15.6% in 5 months)
2. The stock price closes below but near our $87.50 strike price.
Call premium: $3.50
Dividends: $0.99
Total: $4.49 (total income of 5.6% in 5 months)
3. The stock price declines.
There will be $4.49 in income to offset the decline. Plus, the original purchase price is more than $7 per share below the strike price.
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 | $121.20 | $140.00 | 4.29% | -3.52% |
| American Tower Corp. | AMT | 1/23/24 | $202.26 | $227.00 | $220.00 | 2.85% | 14.18% |
| Brookfield Infrstr. Cp. | BIPC | 2/27/24 | $32.64 | $41.06 | $40.00 | 3.95% | 25.43% |
| Cheniere Energy Prtns. | CQP | 7/23/24 | $53.04 | $47.96 | $60.00 | 6.78% | -8.93% |
| Constellation Energy Corp. | CEG | 8/27/24 | $194.99 | $210.00 | |||
| Enterprise Product Ptnrs. | EPD | 2/27/24 | $27.61 | $29.29 | $30.00 | 7.17% | 9.96% |
| FS KKR Capital Corp. | FSK | 4/23/24 | $19.42 | $19.91 | NA | 14.06% | 6.41% |
| Main Street Capital Corp. | MAIN | 3/26/24 | $46.40 | $49.69 | NA | 5.80% | 10.40% |
| NextEra Energy, Inc. | NEE | 4/25/23 | $77.50 | $79.66 | NA | 2.59% | 6.25% |
| ONEOK, Inc. | OKE | 5/29/24 | $79.59 | $88.07 | $84.00 | 4.50% | 11.99% |
| Qualcomm Inc. | QCOM | 5/5/21 | $134.65 | $173.60 | $165.00 | 1.96% | 38.21% |
| Realty Income Corp. | O | 6/27/23 | $60.19 | $61.09 | NA | 5.17% | 8.46% |
| Open Recommendations | Ticker Symbol | Initial Action | Entry Date | Entry Price | Recent Price | Sell To Price or better | Total Return |
| MAIN Sep 20 $49.40 call | MAIN240920C00049400 | Sell | 6/27/24 | $2.00 | $0.65 | $2.00 | 4.31% |
| BIPC Sep 20 $35.00 call | BIPC240920C00035000 | Sell | 7/16/24 | $3.00 | $5.70 | $3.00 | 9.19% |
| AMT Sep 20 $210 call | AMT240920C00210000 | Sell | 7/30/24 | $15.00 | $17.50 | $15.00 | 7.42% |
| OKE Oct 18 $87.5 call | OKE241018C00087500 | Sell Pending | $3.50 | $3.50 | 4.40% | ||
| as of close on 08/23/2024 | |||||||
| 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% |
| The Williams Companies, Inc. | WMB | Called | 8/24/22 | $35.58 | 5/17/24 | $35 | 7.14% |
| 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 | $10.00 | 6.69% | |
| QCOM $170 Apr 26th call | out-of-money | 3/12/24 | $10.00 | 4/26/24 | $10.00 | 7.42% | |
| WMB $35 May 17th call | in-the-money | 3/12/24 | $2.00 | 5/17/24 | $2.00 | 5.62% | |
| QCOM $200 July 19th call | out-of-money | 6/5/24 | $12.00 | 7/19/24 | $12.00 | 8.91% | |
Alexandria Real Estate Equities, Inc. (ARE)
Yield: 4.3%
I was losing my patience with this niche innovation center property REIT, but I’m encouraged by the recent behavior. After hitting a 52-week low, ARE leveled off and then had a nice move higher over the last week. While the other REITs were living it up in the falling interest rate environment, ARE foundered. Although earnings were basically solid and Alexandria reiterated previous guidance, it missed on revenue. However, earnings were only up 5.4% while revenues jumped 7.4%. The lease rates were solid, and Alexandria reported a healthy number of acquisitions. It stumbled after a big surge higher after the earnings report, but the defensive characteristics may serve ARE well going forward with the increased recession fears. BUY
Alexandria Real Estate Equities, Inc. (ARE)
Next ex-div date: September 28, 2024, est.
American Tower Corporation (AMT)
Yield: 2.8%
The cell tower REIT had a huge upside move from April until the beginning of August. It pulled back earlier this month but has since recovered most of those losses. Earnings were solid and the stock is now at the highest level since last January. The prognosis looks bright as customers are being added to existing towers and the properties continue to expand in the U.S. and overseas. It also raised guidance for 2024. BUY
American Tower Corporation (AMT)
Next ex-div date: September 14, 2024, est.
Brookfield Infrastructure Corp. (BIPC)
Yield: 4.0%
This recently very bouncy infrastructure company stock had a big move higher in July. It pulled back at the beginning of this month but has since recovered and just made a new 52-week high. It’s now up more than 30% since early April. Brookfield reported solid earnings with 10% funds from operations growth over last year’s quarter. BIPC had been a stellar performer for many years prior to inflation and rising interest rates. But now interest rates are moving significantly lower, and the main threat is now a recession. That’s in Brookfield’s wheelhouse as its crucial assets are highly recession-resistant. BUY
Brookfield Infrastructure Corporation (BIPC)
Next ex-div date: August 30, 2024
Cheniere Energy Partners, L.P. (CQP)
Yield: 7.7%
Earnings were solid but natural gas prices have fallen. The recent price decline reflects most of the lower natural gas prices and the pressure that could add to margins. However, the price dip is likely to be temporary. The unpredictable weather and geopolitical tensions could ratchet prices higher in a hurry. The world still needs U.S. natural gas. That huge dividend is solid and highly attractive in a market that could sputter in the months ahead, and a recession is now on the radar and headline risk could roil the market. (This security generates a K-1 form at tax time.) BUY
Cheniere Energy Partners, L.P. (CQP)
Next ex-div date: November 8, 2024, est.
Enterprise Product Partners L.P. (EPD)
Yield: 7.2%
This steady midstream energy partnership bent a little but didn’t break in the recent market turbulence. EPD has gone sideways since April, but it has still returned over 16% YTD, after two stellar years in 2022 and 2023, and is back to within bad breath distance of the 52-week high. You can slow it down or temporarily interrupt EPD. But its consistent snail-like ascent endures and inches on. Enterprise reported earnings earlier that were solid, up 12% over last year’s quarter. The distribution is also 5% higher than a year ago and there is still an industry standout 1.6 times distribution coverage with cash flow. (This security generates a K-1 form at tax time.) BUY
Enterprise Product Partners L.P. (EPD)
Next ex-div date: October 31, 2024, set.
FS KKR Capital Corporation (FSK)
Yield: 14.2%
This ultra-high-yielding Business Development Company is also recovering from the recession scare that caused it to be downgraded to a HOLD. FSK also goes ex-dividend in early September. Because the payout is so massive, the date will cause a drop in price. But it appears, at this point, that the recession worry is overblown. While recession is still on the radar, it might be a long way off and that huge payout from FSK should be highly desirable in a more sideways market over the next few months. HOLD
FS KKR Capital Corp. (FSK)
Next ex-div date: September 11, 2024
Main Street Capital Corp. (MAIN)
Yield: 5.8%
This BDC confirmed the monthly dividend of $0.245 per share for the rest of the year and announced an additional $0.30 per share supplemental dividend payable in September. The BDC also has a lot of small business exposure, which is problematic during recessions. The stock got knocked back with the recession scare early this month when it was downgraded to a HOLD. But it has been creeping back higher as recession worries wane. MAIN is now down less than 3% in August after having been in an uptrend since last fall. A recession would certainly change the dynamics. However, solid earnings and reduced recession expectations are resulting in the stock regaining lost ground. HOLD
Main Street Capital Corporation (MAIN)
Next ex-div date: September 8, 2024
NextEra Energy, Inc. (NEE)
Yield: 2.6%
The regulated and alternative energy utility barely budged in the recent market. NEE is in an uptrend and near the 52-week high. It sputtered a bit but has since regained those losses. It is a highly defensive utility, and the recession fears make NEE more desirable. NextEra forecasts revenue growth of 8.3% per year over the next three years, compared to average growth of 4.7% for the electric utility group. There is also growth in anticipation of a steep acceleration in electricity demand in the years ahead prompted by manufacturing, electric vehicle growth, and increasing data center electricity demand because of AI. Renewable demand is expected to grow the most. HOLD
NextEra Energy, Inc. (NEE)
Next ex-div date: August 30, 2024
ONEOK, Inc. (OKE)
Yield: 4.5%
It’s another new high. You can’t keep this more volatile midstream energy company down for long. OKE is still in an uptrend that began in spring of 2023. The company reported earnings with revenues up 31% over last year’s quarter and earnings up nearly 30%. The huge jump is because of recent acquisitions coming online but the future looks solid also. ONEOK is expected to grow annual earnings by 7.3% over the next three years compared to an industry average projection of 1.9%. OKE pulled back in late July and early August but has since regained its footing and made a new all-time high this week while most of its peers are still below the pre-pandemic high. BUY
ONEOK, Inc. (OKE)
Next ex-div date: November 1, 2024, set.
Qualcomm Corp. (QCOM)
Yield: 2.0%
After stumbling badly in the second half of June and July, the chipmaker stock has been moving higher for the past couple of weeks. The selloff did come after a huge surge earlier this year and QCOM is still up 24% YTD. Qualcomm crushed earnings forecasts for the June quarter and guided higher for the September quarter. But the stock fell on the day of the announcement on concerns about weaker-than-expected smartphone sales predicted for the December quarter. But the upgrade cycle is likely coming sometime next year. Qualcomm is well-positioned ahead of the next wave of AI, in mobile devices, and should benefit mightily in the year ahead. BUY
Qualcomm Inc. (QCOM)
Next ex-div date: September 5, 2024
Realty Income Corp. (O)
Yield: 5.3%
The legendary monthly income REIT reported another solid quarter where earnings rose 6% over last year’s quarter and revenues soared 31% spurred by the recent acquisition of Spirit Realty in January. After two rotten years, the relative performance of the REIT has taken off. Realty is up 17% since July 1st and just made a new 52-week high. The main impediment to performance was rising interest rates. But with that situation reversing, O should make up for lost time. It’s already started. HOLD
Realty Income Corporation (O)
Next ex-div date: September 1, 2024
Existing Call Trades
Sell MAIN September 20th $49.40 calls at $2.00 or better
The stock took a hit with the recession scare early this month but has been inching back ever since. MAIN is currently pennies above the strike price. We’ll see what happens with recession talk and the market when the rubber hits the road after Labor Day. But regardless, these calls embellish an already stellar income.
Sell BIPC September 20th $35 calls at $3.00 or better
This stock is running away. It is now more than $6 per share above the strike price. But there are still several weeks of volatile September to go before expiration, and there is a lot of headline risk. Defensive stocks are a great place to be invested right now. But if BIPC gets called we still have the other defensive portfolio positions. With these calls we lock in a high income even if the market continues to flounder.
Sell AMT Sep 20th $210 calls at $15.00 or better
AMT was riding high, but the stock pulled back in August. It is still way above the strike price and a call seems likely at this point. That’s okay. We’ll get a stellar income and a solid total return in a short time. Plus, three weeks can be a long time if the market gets volatile again in September.
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 September 24, 2024.
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