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High Income for a Changing Market
It’s been a good year in the market so far. The S&P 500 is up 6.7% less than two months into 2024. It is a continuation of a strong 23% rally since the end of October. The index has been hitting new all-time highs all year.
Hopefully, the good times will roll for longer. But a problem is looming. Sticky inflation is threatening to change the recent dynamic and end the rally.
For the better part of more than a year, the market indexes thrived as inflation fell sharply and the economy remained strong. Stocks got a further boost from the huge growth catalyst of artificial intelligence in the technology sector and the Fed’s indication that it was done hiking rates. The “soft landing” scenario that seemed like a pipedream a year ago is increasingly seeming like a likelihood.
But that positive prognosis always included the expectation of interest rates falling this year. Several Fed Funds rate cuts have been expected in 2024. And the benchmark longer-term ten-year Treasury rate, which has come well off the high of about 5%, is expected to fall further as the year progresses. But recent inflation numbers could put the kibosh on that. And the lack of falling rates may jeopardize the soft landing.
The Consumer Price Index (CPI) for January was higher than expected at 3.1%. On the surface, it doesn’t seem like a big deal. After all, that’s way down from the high of 9.1% in June of 2022. But the rate of inflation has stopped falling. It has moved higher for several months. That indicates that this recent struggle with higher inflation is not dead.
If problematic inflation isn’t dead, it can reignite, as it has almost every time in the past. The Fed knows that if it takes its foot off the gas and lowers rates anytime soon, inflation could come roaring back. If that happens, it could take another painful rate-hiking cycle just to get back to where we are right now. That should make the Fed very reluctant to cut rates, at least to a meaningful degree.
But rates will have to come down soon to secure the current strong economy and recovery. Temporarily high interest rates are one thing, but lasting high interest rates are quite another. The current high rates will derail the economy eventually as already strapped consumers have to pay high interest for loans and companies eventually roll over their debt.
The Goldilocks scenario of falling inflation and a still-strong economy is unlikely to last. Interest rates will have to come down before long, either because inflation rolls over or despite still-high inflation, or the recession that the market is dismissing might be just a little further down the road. But inflation is making lower rates less likely.
Sure, the rally could last for a while. The economy always seems to be more resilient than people expect. There’s also the AI catalyst in the technology sector. But the circumstances behind the rally since October are unlikely to last. This environment will change. For that reason, I am not chasing stocks that have been working so far this year and am instead trying to position ahead of a new dynamic that is likely coming.
Change creates opportunity. There are many great income stocks that are not benefiting from this rally. Yet these stocks are selling at historically very cheap valuations with high yields. These stocks also can thrive in a slowing economy. In this issue, I highlight two stocks in particular that are cheap and high-yielding ahead of a period of likely market outperformance.
What to Do Now
We are probably in the late innings of the current rally. For that reason, stocks around the 52-week highs have been targeted for covered calls. There are currently calls written on AbbVie Inc. (ABBV) and Marathon Petroleum Corporation (MPC), both of which are selling near all-time highs.
Selling calls against positions that are riding high both generates high call premiums and income and assures a high total return if the stock is called. Sometimes the stock pulls back before options expiration and we keep the stock and sell more calls down the road. Other times the stock runs away and gets called. But the purpose of this newsletter is income. Sometimes a high income comes at the expense of capital appreciation.
Although portfolio position Qualcomm Inc. (QCOM) currently fits the usual criteria, being near the 52-week high after a price surge, I’m making an exception to the usual rule. I believe there is a better-than-even chance QCOM will move still higher in the next several weeks because of current market dynamics and technical strength in the stock itself. I will hold off on selling a covered call on QCOM for now. But stay tuned.
As I mentioned above, I don’t want to chase what has been working in the past several months. Regardless of what happens with inflation, interest rates, and the economy, the market has a couple of things going for it. The AI revolution should continue to flex its muscle this year and defensive stocks are still very cheap despite the market indexes being at all-time highs. Several of these buy-rated defensive stocks should do well in the likely market scenarios ahead.
It’s a good time to cash in on the market’s recent bounty through covered calls. It’s also a good time to position yourself ahead of the next turn of the market.
Monthly Recap
February 14th
Sold MPC March 28th $165 calls at $10.00
February 27th
Buy Brookfield Infrastructure Corporation (BIPC)
Buy Enterprise Product Partners L.P. (EPD)
Featured Actions
Buy Brookfield Infrastructure Corporation (BIPC)
Yield: 4.5%
BIPC is stock representing shares in the same entity as the original Brookfield Infrastructure Partners (BIP), except that instead of a Master Limited Partnership, BIPC is in the form of a regular corporation.
Unlike an MLP, BIPC doesn’t generate a K1 form at tax time or have special tax implications in a retirement account. Dividends generate a regular 1099 and are taxed at the maximum 15% (or in some cases 20%) rate. Shares are also more actively traded because funds and institutions that are prohibited from buying MLPs can now buy them.
Since the BIPC shares were established in early 2020, they have significantly outperformed BIP shares. Since BIPC started trading, shares have returned 85% compared to 53% for BIP over the same period. That’s because demand for shares is higher because more investors can buy them and others find owning a regular corporation more desirable.
Bermuda-based Brookfield Infrastructure Corporation owns and operates infrastructure assets all over the world. The company focuses on high-quality, long-life properties that generate stable cash flows, have low maintenance expenses and are virtual monopolies with high barriers to entry.
Infrastructure is defined as the basic physical structures and facilities needed for the operation of a society or enterprise. It includes things like roads, power supplies and water facilities. Not only are these some of the most defensive and reliable income-generating assets on the planet but infrastructure is rapidly becoming a more timely and popular subsector.
As one of the very few tried and tested hands, Brookfield is right there. It’s been successfully acquiring and managing these properties for more than a decade in a way that delivers for shareholders. Since its IPO in 2008, the original BIP has provided a total return of 882% (with dividends reinvested) compared to a return of 348% for the S&P 500 over the same period. And those returns came with considerably less risk and volatility than the overall market.
Brookfield operates a current portfolio of over 1,000 properties in more than 30 countries on five continents. The company operates four segments: Utilities (29%), Transport (38%), Midstream (24%) and Data (9%).
Assets include:
- Toll roads in South America
- Telecom towers in India and France
- Railroads in Australia and North America
- Utilities in Brazil
- Natural gas pipelines in North America
- Ports in Europe, Australia and North America
- Data centers on five continents.
BIPC currently pays a stellar 4.5% yield. The dividend is rock solid with a low 70% payout ratio and a history of steady growth. The payout has grown by a CAGR (compound annual growth rate) of 10% per year since 2009 and the company is targeting 5% to 9% annual growth going forward.
The infrastructure company has been delivering solid earnings despite the ugly performance over the two previous calendar years. Funds from operations grew 20% in 2022 as new acquisitions came online and followed through with 8.9% FFO growth in 2023.
Roughly 90% of revenues are hedged to inflation with automatic adjustments built into its long-term contracts and its crucial service assets are very recession resistant, and earnings should remain strong even if there is a recession this year. It also helps that the stock pays a solid and growing dividend.
This is a poster-child stock that had a long track record of market-beating performance that suffered a miserable two years in 2022 and 2023 as interest rates rose. BIP returned a negative 16% for the two-year period. And the results were only that good because the stock had a huge 40% move higher in November and December as interest rates moved lower.
Prior to 2022, the original BIP had outperformed the S&P 500 in every measurable period over the previous 10 years with returns of 115%, 146%, and 351% in the previous three-, five- and ten-year periods respectively. The reaction of the stock to peak interest rates has been stellar with a 40% spike late last year. But you haven’t missed the boat. BIP still sells more than 30% below the all-time high with much higher earnings now.
Buy Enterprise Product Partners (EPD)
Yield: 7.5%
(This security generates a K1 form at tax time)
Enterprise Products Partners (EPD) is one of the largest midstream energy companies in the country, with a vast portfolio of service assets connected to the heart of American energy production. It is connected to every major U.S. shale basin and 90% of American refiners east of the Rockies and offers export facilities in the Gulf of Mexico as well.
The thing that jumps out about this master limited partnership (MLP) is the distribution. It currently yields 7.5%. MLPs tend to have higher yields because they are required to pay out most of their earnings to unitholders in the form of distributions, but I’ve never seen a yield that high that is this safe. Distributable cash flow covered the distribution by 1.6 and 1.7 times in the two worst quarters of the pandemic. A ratio of 1.2 is considered conservative. The most recent quarter showed 1.9 times coverage.
The high-paying midstream goliath keeps quietly delivering. In the 2022 bear market, when the S&P 500 was down 19.5%, EPD returned 15% for the year. Last year, EPD returned 17.21%. It is benefiting from a strong energy market but also has properties that should enable superior relative performance even if the economy turns south. It should be good to go in just about any market.
As a midstream energy company, Enterprise is not levered to commodity prices but rather collects fees for the services of transporting and storing crude oil, natural gas, natural gas liquids, and various refined products. Roughly three-quarters of the partnership’s operating margins are tied to highly predictable long-term, fixed-fee contracts with inflation adjustments built in. That’s why the distribution has been secure in any kind of market and Enterprise has been able to raise the distribution for 25 consecutive years.
The dynamics of the energy market are also highly favorable. The global energy industry has had many years of capital underinvestment that will continue to limit supply amid ever-rising global demand. Under the circumstances, oil and gas are likely to continue to flow through Enterprise’s systems. It also retains enough cash to invest in group projects. The hostile regulatory environment is much kinder to already established players, further pressing Enterprise’s advantage as a huge player.
Although EPD is near the 52-week high, the stock is still cheap at just 10 times Wall Street’s forward-year consensus earnings estimates. The price is also more than 30% below the all-time high with significantly higher earnings. The partnership has also been historically less volatile than the overall market. That does make for lower call premiums. But with that huge yield, it doesn’t take high call premiums to augment that yield into a yearly income well into the double digits.
Portfolio Recap
| Open Recommendations | Ticker Symbol | Entry Date | Entry Price | Recent Price | Buy at or Under Price | Yield | Total Return |
| AbbVie Inc. | ABBV | 7/25/23 | $141.63 | $178.09 | $150.00 | 3.48% | 28.21% |
| Alexandria Real Estate Eq. | ARE | 12/19/23 | $129.54 | $121.93 | $140.00 | 4.17% | -4.95% |
| American Tower Corp. | AMT | 1/23/24 | $202.26 | $189.93 | $220.00 | 3.58% | -6.10% |
| Brookfield Infrstr. Cp. | BIPC | 2/26/24 | $35.67 | $40.00 | 4.54% | ||
| Enterprise Product Ptnrs. | EPD | 2/26/24 | $27.68 | $30.00 | 7.24% | ||
| Marathon Petroleum Corp. | MPC | 10/24/23 | $149.45 | $169.54 | $155.00 | 1.95% | 15.27% |
| NextEra Energy, Inc. | NEE | 4/25/23 | $77.50 | $56.78 | $65.00 | 3.63% | -25.46% |
| Qualcomm Inc. | QCOM | 5/5/21 | $134.65 | $154.91 | $165.00 | 2.07% | 22.26% |
| Realty Income Corp. | O | 6/27/23 | $60.19 | $52.94 | $62.00 | 5.81% | -8.69% |
| The Williams Companies | WMB | 8/24/22 | $35.58 | $34.94 | $38.00 | 5.44% | 6.59% |
| Xcel Energy Inc. | XEL | 8/22/23 | $57.95 | $59.33 | $65.00 | 3.69% | 4.16% |
| Call Trades | |||||||
| Open Recommendations | Ticker Symbol | Initial Action | Entry Date | Entry Price | Recent Price | Sell To Price or better | Total Return |
| ABBV Mar 15th $160 call | ABBV240315C00165000 | Sell | 1/10/24 | $7.00 | $14.47 | $18.35 | 4.94% |
| MPC Mar 28th $165 call | MPC240328C00165000 | Sell | 2/14/24 | $10.00 | $10.41 | $9.12 | 6.69% |
| as of close on 02/23/2024 | |||||||
| SOLD STOCKS | |||||||
| 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 | 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% |
| 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 | 11/22/24 | $6.00 | 1/19/24 | $6.00 | 5.11% | |
| INTC $42.50 Jan 19th call | in-the-money | 11/29/24 | $3.50 | 1/19/24 | $3.50 | 8.71% | |
AbbVie Inc. (ABBV)
Yield: 3.5%
ABBV is coming off a tough 2023 as it had to deal with shrinking revenues and earnings as its mega-blockbuster drug Humira lost patent exclusivity in the U.S. But that has been long expected and well planned for. Investors are now looking toward the promising future beyond as management expects moderate earnings growth this year and robust growth next year. Management expects combined sales of just two immunology replacement drugs, Skyrizi and Rinvoq, will be $16 billion this year (Humira peak sales were $21 billion) and $27 billion in 2027. ABBV has broken out of the old range to a new all-time high as investors are starting to price in the company turning the corner on the way the a bright future. HOLD
AbbVie Inc. (ABBV)
Next ex-div date: April 12, 2024
Alexandria Real Estate Equities, Inc. (ARE)
Yield: 4.2%
The life science property REIT had mostly a terrible last two calendar years as interest rates rose and the REIT sector took it on the chin. Alexandria also got lumped in with office REITs, which are suffering from the work-from-home trend with low occupancy rates. But the company provides lab space and related offices that aren’t affected. ARE surged far more than its peers in the last two months of last year as the interest rate trade reversed. But it has struggled through most of this year so far as interest rates moved up again amid the stronger economy. Things might be changing though. ARE has broken the downside trend of the last two months while it remains one of the very best REITs on the market. BUY
Alexandria Real Estate Equities, Inc. (ARE)
Next ex-div date: March 28, 2024, est.
American Tower Corporation (AMT)
Yield: 3.6%
Recent trading reflects that of ARE, except the reversal of the recent downtrend is not as pronounced. This is one of the best REITs on the market that deals in very high-quality properties. The cell tower properties will only grow in demand in the years ahead, and in any other interest rate environment, AMT will sell at a much higher price. The current dynamic could last a while though as inflation is remaining sticky. But ARE will most certainly shine again. In the meantime, it pays you to wait. BUY
American Tower Corporation (AMT)
Next ex-div date: March 28, 2024, est.
Marathon Petroleum Corp. (MPC)
Yield: 2.0%
You never know. When MPC was purchased in the portfolio, I believed the economy would turn south in the months ahead. But I wanted a hedge in case I was wrong. That’s turning out very well so far. The economy is stronger than expected and this refiner stock is shining near all-time highs. Earnings and revenues remain very strong by historical standards. The company is flush with cash from the boom times while robust profits continue to roll in. This stock has consistently outperformed its peers and has been solid even in environments when the overall energy sector struggled. MPC is also poised to rise on continuing tension in the Middle East, which tends to lift all energy stocks. BUY
Marathon Petroleum Corporation (MPC)
Next ex-div date: May 20, 2024, est.
NextEra Energy, Inc. (NEE)
Yield: 3.6%
The past two years have been awful for this combination regulated and clean energy utility. But it’s cheap with a great long-term track record. 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. The utility reported strong earnings that exceeded expectations again last month and reiterated its growth projections for this year, near the top of the estimated range. The interest rate-related weakness should at least diminish going forward as rates have likely peaked. This stock is still oversold. It should have its day in the sun again, and probably before long. BUY
NextEra Energy, Inc. (NEE)
Next ex-div date: February 26, 2024
Qualcomm Corp. (QCOM)
Yield: 2.1%
Qualcomm is secretly one of the best semiconductor and AI stocks to own. But it has been held back by cyclicality, both in semiconductors and smartphones. But the negative cycle is coming to an end, and QCOM is aching to surge higher. The Semiconductor Industry Association is forecasting 13% growth in worldwide chip sales this year after sales contracted 8% last year despite a rebound in the second half of the year. Leaders like Qualcomm should experience a much higher level of growth than the overall industry. Qualcomm is introducing new AI chips for PCs and smartphones that could be big sellers this year. It’s an AI beneficiary that just hasn’t really had its day yet. BUY
Qualcomm Inc. (QCOM)
Next ex-div date: February 28, 2024
Realty Income Corp. (O)
Yield: 5.8%
This beleaguered stock has consistently and historically been one of the very best income stocks to own of all time. The monthly dividend has been raised every year since the Nixon administration. But the last two years of inflation and rising interest rates have been among the worst two years in this stock’s history. That makes it dirt cheap ahead of an environment that will almost surely at least stop getting worse. It’s probably the very late innings of the recent market dynamic and O is well positioned ahead of a likely shift in the future. It is still a great stock at a cheap price with retail staple properties and solid growth likely ahead. BUY
Realty Income Corporation (O)
Next ex-div date: February 29, 2024
The Williams Companies, Inc. (WMB)
Yield: 5.4%
The year started awfully for dividend stocks, and the energy sector is barely positive YTD. That’s an ugly backdrop for WMB. It fell near the lowest level since last fall. But the defensive and high-end midstream energy stock has been moving higher again of late as earnings beat expectations and the company raised guidance for 2024. While the market environment temporarily turned against WMB, it is still thriving operationally. It pays a well-supported dividend (with 2.38 times cash flow coverage). Recent acquisitions and expansions ensure more solid growth going forward all the way out to 2028. WMB has gone sideways since last summer but the high dividend is safe and the company is well-positioned for just about any environment going forward. BUY
The Williams Companies, Inc. (WMB)
Next ex-div date: March 7, 2024
Xcel Energy Inc. (XEL)
Yield: 3.7%
Utilities are still remarkably reliable revenue generators in any economy. Alternative energy is still the wave of the future. A combination of safety and growth is still highly desirable. But XEL has been a dog. It had a rotten two years until November and December when it turned sharply higher. But this year has seen a return of ugliness as investors walked away from interest rate-sensitive stocks. But Xcel reported solid earnings on lower operating expenses. This is one of the best utility stocks to own and the recent debauchery may prove to be very temporary. XEL still sells near the lowest valuations of the past several years. BUY
Xcel Energy Inc. (XEL)
Next ex-div date: March 14, 2024
Existing Call Trades
Sell ABBV March 15th $160 calls at $7.00 or better
The rally in ABBV has continued. The previous two times it had hit the yearly high, it pulled back in the following months. But not this time so far. The stock has broken out of the range in which it has traded for the last two years. It could be that investors are looking ahead to when earnings truly turn the corner next year and will continue to run higher. But it could also pull back and consolidate if investors sense they might be a little early to the party. But we locked in a high income and possibly a strong total return if ABBV is called.
Sell MPC March 28th $165 calls at $10.00 or better
The good times are rolling, MPC has a history of strong performance even when the energy sector is weak. The recent strong economy is providing solid profits. MPC is making new highs and is still in an uptrend that has lasted years. But the refining business can turn on a dime. It could be a completely different story by option expiration, or even next week for that matter. Meanwhile, we secured a high income and possible strong total return.
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 March 26, 2024.
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