Profit from This Massive Housing Shortage
This country has a massive shortage of housing.
It is estimated that the current demand for homes exceeds the national supply by a whopping 4.5 million. The shortfall has caused the median U.S. home price to double since 2011 and soar a staggering 40% just since the pandemic. In many areas, prices have increased a lot more.
There are several reasons for the supply shortfall. The overall level of new home construction declined since the financial crisis and hasn’t kept up with population growth. Millennials, the largest generation in U.S. history, are reaching prime home-buying age after new home building fell to the lowest level in six decades over the last ten years. But high prices aren’t the only problem in the housing market.
In response to the highest inflation in forty years, interest rates have soared, and mortgage rates have risen to multi-decade highs. The higher mortgage rates greatly increase monthly payments for the same size mortgage. Combine higher payments with higher prices and buyers are priced out. Zillow estimates that only 15.1% of current non-homeowner households can afford a typical mortgage.
The problem isn’t just with buyers. It’s with sellers too. Many would-be sellers have been reluctant to sell their homes and trade up because they don’t want to swap their low-rate mortgage for a high-rate one. There aren’t enough new homes, and existing homes aren’t coming on the market either. Buyers can’t buy and sellers won’t sell.
But there is reason to believe the housing problems will get a lot better in the years ahead.
Mortgage rates are falling. The average U.S. 30-year fixed mortgage rate has fallen to 6.6% from 7.2% this past May and 7.8% a year ago. And rates are likely to continue to trend lower from multi-decade highs in the years ahead. Prices are coming down too. The average U.S. home price has declined about 7% since the beginning of last year.
The housing problem is also well-known. It was even brought up several times at both parties’ political conventions this summer. Remedies in the form of tax breaks, relaxed regulations and other things are on the way. Plus, the market almost always corrects itself. Diminished supply will surely be met with increased construction. At the same time, improving mortgage rates and pricing combined with pent-up demand is likely to increase housing market activity in the years ahead.
While the situation is likely to improve, the supply/demand imbalance will likely remain for several years. That’s a problem for the housing market and economy to work through. But it’s good news for homebuilders. New homes should be in high demand for years to come, and sales should increase with the improving conditions.
What to Do Now
What a market! This bull market is now two years old, and the S&P 500 has returned over 60% in that time. Nothing seems to stop the ascent, and the S&P is already up 23% YTD.
The Fed has just begun a rate-cutting cycle that will likely last for the next two years. Longer-term rates have peaked and will likely trend lower. Meanwhile, the economy is solid with no signs of recession. There is also the artificial intelligence catalyst powering the largest sector of the market higher.
Sure, there are risks. There always are. The economy could still roll over in the months ahead. The two wars aren’t stopping and could escalate at any time. A highly contentious election is just two weeks away. A bad headline could send stocks reeling any day. But even if the market gets spooked, it likely won’t end the bull market. Bull markets can correct, but they don’t tend to die after two years without a game-changing disaster.
The biggest drawback is valuation. The market is high and expensive. The long-term average return of the S&P 500 is 11%. But the index is up 60% in the last two years and has averaged a yearly return of 13% over the last decade. The market may stay hot for the rest of this year, but stocks are likely to cool off at some point.
High valuations alone usually don’t end bull markets, but they can certainly hinder returns. A flatter market seems inevitable in the years ahead. But that increases the relative return of dividend stocks, as income becomes a larger part of total return. Adding to that income with covered calls is also a great way to not only enhance income but maintain strong returns when the market flounders.
At the same time, many dividend-paying stocks have performed badly for most of the last two years, until recently. The falling rates and flatter market are likely to increase the relative return and investor demand going forward and the “BUY”-rated portfolio stocks still offer good value. The overall market may be overpriced, but most income stocks are not. They have good value and momentum ahead of a period of likely outperformance.
Recent Activity
September 24
Purchased AGNC Investment Corp. (AGNC) - $10.47
September 25
Sold CEG Dec 20th $260.00 calls at $24.00 or better
October 8
Sell NEE Nov 15th $85.00 calls at $5.00 – Remove
Alexandria Real Estate Equities, Inc. (ARE) – Rating change “BUY” to “HOLD”
October 15
Constellation Energy Corporation (CEG) – Rating change “BUY” to “HOLD”
October 18
OKE Oct 18 $87.50 calls at $3.50 – Expired
ONEOK, Inc. (OKE) – Called
October 22
Buy Toll Brothers, Inc. (TOL)
Sell FSK Dec 20th $20.00 calls at $0.95 or better
Featured Action
Buy Toll Brothers, Inc. (TOL)
Toll Brothers is the leading luxury homebuilder in the United States. The company operates in over 60 markets across 24 states and caters to move-up, active adult and second-home buyers. Although the main business is home sales, Toll Brothers owns and operates several related businesses in architecture, engineering, mortgage, title, land development, landscaping and lumber distribution.
At first glance, the company may seem to miss the mark. There is a huge demand for first-time homes and new homebuyers. Toll Brothers isn’t in that market. But it benefits greatly from the current housing shortage with more predictable and dependable affordable luxury buyers. It offers prestigious locations and distinctive architecture for a range of dwellings including traditional homes, city apartments, and adult communities.
Most first-time homebuyers will buy their houses from existing homeowners, and many of those people will trade up. There are a couple of powerful trends that make step-up moves likely. Wealth creation has been excellent as many buyers have benefited from a strong stock market over the last decade-plus, not to mention increasing home values and individual wealth are above historical averages.
New homes are also cheaper on a relative basis. Historically, the premium paid for new builds has been 17%, but that has fallen to 5% in 2024 as existing home prices have soared. Millennials are in their prime homebuying years and Baby Boomers are making lifestyle changes. Tolls Brother is a very strong player in empty-nester homes and active adult communities.
In this market, Toll Brothers and similar companies have been gaining market share like crazy from private companies. Public, or publicly traded homebuilder companies, now represent 53% of this country’s new home settlement, up from just 27% in 2012. Toll Brothers’ operational results have reflected the improving environment.
Since 2013, book value per share has grown by a compound annual growth rate (CAGR) of 13%, from $19.68 to $76.50. Return on equity has had a CAGR of 14% and earnings per share (EPS) have experienced 28% annual growth over the same period, from $0.97 to an estimated $14.50 to $14.74 for 2024. How has this been reflected in stock performance?
These are the stock returns compared to those of the S&P 500 over the last decade (as of 10/18/24).
| 1-year | 3-year | 5-year | 10-year | |
| Toll Brothers (TOL) | 131% | 172% | 320% | 450% |
| S&P 500 | 41% | 35% | 111% | 260% |
While the TOL returns have blown away those of the overall market, that creates a concern. Have we missed the boat? I don’t think so. First, earnings have risen steadily. Also, the company has been hugely active in buying back shares. Since 2016, Toll Brothers has repurchased a whopping 50% of existing shares on the market. As a result of higher earnings and fewer shares, TOL sells at both a current and forward price/earnings ratio of less than 11 times, half that of the overall market.
But those things are in the rearview mirror. How do things look going forward?
The industry dynamics have greatly improved in just the last few years, as was mentioned above. Demand will outstrip supply of new housing for many years to come. And Toll Brothers has still barely made a dent in the potential. Toll Brothers is currently selling about 10,700 homes per year. But according to the company, the potential or addressable market for its type of homes is an estimated 575,000. That’s only 1.9% penetration.
There are good reasons why these large publicly traded homebuilders have taken so much market share. Big companies can get building supplies at cheaper prices than smaller competitors because of volume discounts and profit margins are larger. They also have deep pockets and do great marketing, with spectacular spec houses. Toll Brothers is the most recognizable brand name in the business and is synonymous with luxury living, and they know how to build luxury homes in areas that homebuyers most desire. They have it down to a science.
But there is something else that is just as crucial to the homebuilding operation as the home itself – land. Sure, a good homebuilder can whip up a great home. But you need the land to build it on in desirable locations, which is increasingly scarce and very difficult to get approval to develop. Toll Brothers has the deep pockets and know-how to run a large and effective land acquisition operation. Toll Brothers currently has a backlog of 73,000 owned or optioned properties. The properties are mostly highly desirable areas, and the premier inventory provides a massive advantage over competitors.
The stock has moved a lot higher over the last year as investors increasingly recognize the opportunity. But TOL has momentum and is likely to provide a call writing opportunity in the near future.
Tol Brothers, Inc. (TOL)
Next ex-div date: January 10, 2025, est.
Toll Brothers, Inc. (TOL)
Security type: Common Stock
Sector: Residential Construction (Consumer Discretionary)
Price: $159
52-week range: $68.08 - $160.12
Yield: 0.60%
Profile: Toll Brothers is the nation’s top builder of luxury homes.
Positives
- Housing demand outstrips supply and will continue to do so for many years.
- Purchases are likely to increase as mortgage rates decrease.
- Toll Brothers is an elite brand with huge advantages of deep pockets and land backlogs.
Risks
- A recession is very bad for this type of stock and would pummel the price.
- The stock has already had a big move higher to reflect the improving industry dynamics.
Sell FSK Dec 20th $20.00 calls at $0.95 or better
Expiration date: December 20th
Strike price: $20.00
Call price: $0.95
FS KKR Capital Corp. (FSK)
This massive-income-paying stock has run up near the 52-week high. The stock usually pulls back after it goes ex-dividend because the dividend is so large relative to the price. It barely pulled back after the September dividend because tailwinds of a stronger economy compensated. The price tends to bounce around in a range with the payout being the biggest part of total return by far. Let’s grab a big call premium while the stock is riding higher and further embellish an already stellar income.
Here are the three scenarios.
1. The stock closes above the $20.00 strike price at expiration.
Call premium: $0.95
Dividends: $2.09
Appreciation: $0.58 ($20.00 strike price minus $19.42 purchase price)
Total: $3.62 (total return will be 18.6% in 8 months)
2. The stock price closes below but near our $20 strike price.
Call premium: $0.95
Dividends: $2.09
Total: $3.04 (total income of 15.7% in 8 months)
3. The stock price declines.
There will be $3.04 in income to offset the decline. Plus, the original purchase price is below the strike price.
Portfolio Recap
| Open Recommendations | Ticker Symbol | Entry Date | Entry Price | Recent Price | Buy at or Under Price | Yield | Total Return |
| AGNC Investment Corp | AGNC | 9/24/24 | $10.47 | $10.60 | $12.00 | 13.58% | 2.40% |
| Alexandria Real Estate Eq. | ARE | 12/19/23 | $129.54 | $121.25 | NA | 4.27% | -1.98% |
| Cheniere Energy Prtns. | CQP | 7/23/24 | $53.04 | $48.96 | $60.00 | 7.53% | -7.03% |
| Constellation Energy Corp. | CEG | 8/27/24 | $196.14 | $270.16 | NA | 0.52% | 37.74% |
| Enterprise Product Ptnrs. | EPD | 2/27/24 | $27.61 | $29.18 | $30.00 | 7.20% | 9.55% |
| FS KKR Capital Corp. | FSK | 4/23/24 | $19.42 | $20.52 | NA | 13.65% | 13.65% |
| NextEra Energy, Inc. | NEE | 4/25/23 | $77.50 | $84.38 | NA | 2.44% | 13.26% |
| Qualcomm Inc. | QCOM | 5/5/21 | $134.65 | $170.92 | $180.00 | 2.00% | 36.86% |
| Realty Income Corp. | O | 6/27/23 | $60.19 | $64.71 | NA | 4.89% | 15.85% |
| Toll Brothers, Inc. | TOL | 10/22/24 | $159.58 | $170.00 | 0.58% | ||
| Open Recommendations | Ticker Symbol | Initial Action | Entry Date | Entry Price | Recent Price | Sell To Price or better | Total Return |
| CEG Dec 20 $260 call | CEG241220C00260000 | Sell | 9/25/24 | $24.00 | $29.15 | $24.00 | 12.24% |
| FSK Dec 20 $0.95 call | FSK241220C00020000 | Sell Pending | $0.93 | $0.95 | 4.89% | ||
| as of close on 10/18/2024 | |||||||
| 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 | $100.00 | 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 | 4/14.2022 | $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//2023 | $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% |
| Main Street Capital Corp. | MAIN | Called | 3/26/24 | $46.40 | 9/20/24 | $49 | 10.91% |
| Brookfield Infrastructure Cp. | BIPC | Called | 2/27/24 | $32.64 | 9/20/24 | $35 | 11.00% |
| American Tower Corp. | AMT | Called | 1/23/24 | $202.26 | 9/20/24 | $210 | 5.43% |
| ONEOK, Inc. | OKE | Called | 8/27/24 | $79.59 | 10/18/24 | $88 | 11.18% |
| 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 $200 July 19th call | out-of-money | 6/5/24 | $12.00 | 7/19/24 | 12 | 8.91% | |
| MAIN $49.4 Sep 20th Call | in-the-money | 6/27/24 | $2.00 | 9/20/24 | 2 | 4.31% | |
| BIPC $35 Sep 20th Call | in-the-money | 7/16/24 | $3.00 | 9/20/24 | 3 | 9.19% | |
| AMT Sep 20 $210 call | in-the-money | 7/30/24 | $15.00 | 9/20/24 | 15 | 7.42% | |
| OKE Oct 18 $87.50 call | in-the-money | 8/27/24 | $3.50 | 10/18/24 | 3.5 | 4.40% | |
AGNC Investment Corp. (AGNC)
Yield: 13.6%
This high-yielding mortgage REIT has been trending higher since April. There was somewhat of a selloff in September and early October as economic strength put a damper on the expectations for declining interest rates. But AGNC has bounced right back near the high. The current perception of a strong economy may temper the stock price advance. But the delay should be temporary. The narrative could change, and rates should trend lower over the next several quarters regardless. BUY
AGNC Investment Corp. (AGNC)
Next ex-div date: October 31, 2024
Alexandria Real Estate Equities, Inc. (ARE)
Yield: 4.3%
The subpar performance continues as this life science property REIT just bounces around to nowhere. REITS have had a great run over the past few months as interest rates have headed lower, but you wouldn’t know it from the performance of ARE. It has spiked higher over the past few weeks, but it has periodically done that only to pull back again. The stock was downgraded to a hold a few weeks ago. ARE will continue to be held in the portfolio for now because the market may be overreacting to the recent job numbers and Alexandria reports earnings this week. Hopefully, the results will be good and ARE can generate some kind of lasting traction from here. HOLD
Alexandria Real Estate Equities, Inc. (ARE)
Next ex-div date: December 31, 2024, est.
Cheniere Energy Partners, L.P. (CQP)
Yield: 7.5%
The stock tends to bounce around most of the time with an occasional spike in the stock price. CQP has peaks and valleys, and it has been hanging around in a valley since early August. But a new peak should arrive in the quarters ahead, at which point we can sell a covered call. In the meantime, you get a 7.5% yield while you wait. Part of the reason for the recent weakness is natural gas prices have fallen on weaker global demand. However, a resilient economy is a tailwind, and an escalation in the Middle East war could also spike prices higher. (This security generates a K-1 form at tax time.) BUY
Cheniere Energy Partners (CQP)
Next ex-div date: November 7, 2024, est.
Constellation Energy Corporation (CEG)
Yield: 0.5%
This nuclear energy provider has become a bona fide superstar. It has already returned nearly 40% in the less than two months it has been in the portfolio. CEG had a huge one-day 22% move higher after it was announced that Microsoft (MSFT) made a deal with Constellation to buy electricity generated from a future reopening of the Three Mile Island nuclear plant in Pennsylvania. Constellation says it is the largest electricity purchase in history. The deal will add to its projected double-digit earnings growth in the years ahead. Also, the electricity demand growth and technology companies’ desire for carbon-free nuclear power is getting a lot of investor attention. Future increases in business from other big technology companies is now more likely. HOLD
Constellation Energy Corp. (CEG)
Next ex-div date: November 12, 2024, est.
Enterprise Product Partners L.P. (EPD)
Yield: 7.2
Although this steady midstream energy partnership has returned (between dividends and appreciation) over 16% YTD and is within pennies of the 52-week high, it has been rangebound since the spring. The improving interest rate situation has reignited previously beleaguered REITs and Utilities, and those sectors have gotten most of investors’ attention. Midstream energy companies are not being seen as turnarounds because they have been performing well all along. Still, EPD has not had the recent move higher that many of its peers have had. Despite the lack of recent upside, EPD pays the highest yield, and the stock has been very steady. (This security generates a K-1 form at tax time.) BUY
Enterprise Product Partners (EPD)
Next ex-div date: October 31, 2024
FS KKR Capital Corporation (FSK)
Yield: 13.6%
FSK is getting some strength from the strong job numbers and current perception of a solid economy going forward. It owns a portfolio of small companies that tend to be vulnerable during a recession. This ultra-high-yielding Business Development Company went ex-dividend last month and the price barely moved. When a security has a payout and yield of this size it usually pulls back after the quarterly dividend gets priced out of the stock. But the upside momentum met that downside catalyst head-on and greatly mitigated the damage. As long as the economy stays out of trouble, FSK should be solid. HOLD
FS KKR Capital Corp. (FSK)
Next ex-div date: December 11, 2024, est.
NextEra Energy, Inc. (NEE)
Yield: 2.4%
This utility that had been on fire for most of this year pulled back earlier this month. It makes sense. Utilities cooled as the anticipated stronger economy is reducing the level at which interest rates are expected to fall. Utilities were the best-performing market sector YTD and were due to cool off. But interest rates are likely to trend lower in the quarters ahead and NEE had been a market-beating superstar before inflation and rising rates. In fact, NEE has been moving back toward the high. There is also growth due to anticipation of a steep acceleration in electricity demand in the years ahead. Renewable demand is expected to grow the most. HOLD
NextEra Energy, Inc. (NEE)
Next ex-div date: November 22, 2024
Qualcomm Corp. (QCOM)
Yield: 2.0%
This sleeping giant semiconductor stock pulled back over the summer and has been going sideways for months. But it’s still up about 24% YTD. QCOM can make up for lost time fast when it does move. This earnings season could be the catalyst. The AI trade sputtered last quarter but there are signs of a resurgence as earnings could be stellar again. Qualcomm reports at the end of this month. The company is very well positioned ahead of the next wave of AI, which should be in mobile devices. Analysts are forecasting a strong upgrade cycle for smartphones sometime next year. The stock seems to be treading water until its next move higher, whenever that will be. BUY
Qualcomm Incorporated (QCOM)
Next ex-div date: December 5, 2024, est.
Realty Income Corp. (O)
Yield: 4.9%
It’s a new 52-week high this week. The legendary monthly income REIT has been reborn in recent months. After two years of lousy performance, the improved interest rate outlook is revitalizing this one. It’s up 25% just since the beginning of July. The price had leveled off for a while but has gotten a pop in the last couple of weeks. There has been some gloom regarding interest rates and interest rate-sensitive stocks after the economic prognosis improved. But that gloom was overdone as investors realized that interest rates are still likely to trend lower over the next several quarters and years. The negative catalyst that hurt the stock is over. HOLD
Realty Income Corporation (O)
Next ex-div date: November 1, 2024
Existing Call Trades
Sell OKE Oct 18th $87.50 calls at $3.50 – Expired
This midstream energy company got hot and ran away and the stock was called. It’s nearly $10 per share above the strike price. Losing potential appreciation is inherent in covered call writing. That’s the sacrifice for high income. The big catalyst was the news event of two large acquisitions that will be accretive to earnings soon and which the market loves. But a better than 15% return in five months isn’t a bad consolation prize. OKE has been money in the bank in this portfolio as many calls have been sold on previous holdings. The winning streak continues and OKE will likely be added to the portfolio again when there is weakness in the stock.
Call premium: $3.50
Dividends: $0.99
Appreciation: $7.91 ($87.50 strike price minus $79.59 purchase price)
Total: $12.40 (total return 15.6% in 5 months)
Sell CEG Dec 20th $260.00 calls at $24.00 or better
We sold the calls after this stock had a huge move higher. CEG hasn’t really pulled back since as investors are anticipating more deals with other large technology companies. It’s possible CEG soars back to a new high. There is also a good chance that it hangs around this level or goes lower. As of now, it is well below what the strike price plus the call premium would deliver.
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 November 26, 2024.
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