A New Market Era Opportunity
With fall comes change, not only in the weather but in the market.
For most of the last two years, it has been a market of high interest rates and technology sector dominance. In early 2022, the Fed began the steepest and most pronounced interest rate hiking cycle in decades to combat the highest inflation in 40 years. In just a year and a half, the Fed Funds rate was raised from 0% to 5.50%. The benchmark 10-year Treasury rose from 1.4% to 5% over the same period.
The market bottomed out in the fall of 2022 and began a torrid rally led by technology stocks. Artificial intelligence emerged as a huge growth catalyst and the sector drove the market higher for most of the time since. Market returns were impressive. But the performance was driven by technology alone as other sectors struggled with lame returns.
That dynamic began to change this past summer. The economy started to show signs of slowing, possibly toward recession. It became clear that the Fed would start lowering rates in September. Longer-term rates started to decline as well. The previously beleaguered interest rate-sensitive stocks and defensive stocks ignited and began to lead the overall market higher as technology pulled back.
Since the summer, this new trend has been unambiguously confirmed. And it is unlikely to be a mere short-term gyration but rather the beginning of a new environment that should last for some time.
The Fed lowered the Fed Funds rate last week for the first time since the pandemic, and by 0.50%. While investors will fret over the frequency and pace of future rate cuts, the process of lowering rates has begun, and it will likely last for the next two years.
It is a whole new part of the cycle. The situation is changing from one of high inflation and high interest rates to one of falling inflation and interest rates in a weakening economy. The cycle reversal will create new winners and losers.
In this issue, I highlight a great monthly income stock. The yield is massive, and it provides a high income in an uncertain market. The stock also can provide great price performance when the interest rate cycle goes its way. This point in the cycle provides a great opportunity to get a high income and total return on the right side of a pronounced market shift ahead.
What to Do Now
The market is riding high again. After a rough start to the month, stocks have sharply recovered, and the S&P 500 just hit a new all-time high last week.
The big news is the Fed rate cut. The Fed Funds rate was finally cut last week by the high end of what was expected, 50 basis points. And rates have only just begun to go lower. At the same time, recession fears have abated, and investors are increasingly expecting a “soft landing.” We might get rate cuts without the economic pain.
A soft landing would be great. I hope it happens. But the story is not over. Things can change fast. It only takes one rotten economic number to make investors cry recession again. Plus, there are still the two wars going on with no end in sight and a highly contentious election just weeks away.
It’s a good time to take a more cautious and income-oriented approach to investing. Defensive and interest rate-sensitive stocks in the portfolio have reignited. They typically trend higher in this part of the interest rate cycle, which is still in the early stages. And the relative performance is historically very good if the economy does roll over.
Interest rate-sensitive stocks in REITs and Utilities have gone from being the worst-performing market sectors to the best. These stocks have been laggards for a long time and have a lot of catching up to do. They are still cheap, high yielding, and now have momentum.
The market is also at the high with much uncertainty out there. It’s a great time to cash in on the soaring market and the high prices while they last with covered calls. The rising market creates higher call premiums and higher income. It’s a great time to lock in the higher income, and potentially solid total returns, while the getting is good.
There is currently an outstanding covered call on ONEOK (OKE) and another one pending on NextEra Energy (NEE). In this issue, I highlight another covered call on recent portfolio addition Constellation Energy (CEG), as that stock has risen more than 30% above the purchase price in just one month.
Three existing covered calls expired last week and the stocks were called. American Tower (AMT), Brookfield Infrastructure Corporation (BIPC), and Main Street Capital (MAIN) were all in the money when options expired. We did sacrifice some capital appreciation for income as a couple of the stocks soared well above the strike price. But we locked in a high income and total return and took profits in high-flying stocks while the market was riding high.
Recent Activity
August 27
Purchased Constellation Energy Corporation (CEG) – $196.14
Sell OKE Oct 18th $87.50 calls at $3.50 or better
September 17
Sell NEE Nov 15th $85.00 calls at $5.00 or better
September 20
MAIN Sep 20th $49.40 calls at $2.00 – Expired
Main Street Capital Corp. (MAIN) stock – Called
BIPC Sep 20th $35 calls at $3.00 – Expired
Brookfield Infrastructure Corp. (BIPC) stock – Called
AMT Sep 20th $210 calls at $15.00 – Expired
American Tower Corporation (AMT) stock – Called
September 24
Buy AGNC Investment Corp. (AGNC)
Sell CEG Dec 20th $260.00 calls at $24.00 or better
Featured Action
Buy AGNC Investment Corp. (AGNC)
Yield: 13.7%
AGNC Investment Corp. is a Real Estate Investment Trust (REIT) that invests in U.S. government agency mortgage-backed securities. Unlike most REITs which invest in various real estate properties, AGNC owns a portfolio of mortgage securities.
The $66 billion portfolio is invested primarily (90.5%) in fixed-rate mortgage-backed securities (MBS) from The Federal National Mortgage Association (Fannie Mae) and The Federal Home Loan Mortgage Corporation (Freddie Mac). These securities have the backing of the U.S. government and have an implied zero credit risk. The rest of the portfolio is invested in adjustable-rate and non-agency mortgages.
Most of these MBS (96%) are 30-year fixed-rate mortgages with an overall interest rate of 5.87%. The REIT uses leverage to borrow money at short-term interest rates and buy longer-term securities that pay a higher rate. AGNC makes profits based on the difference between what the MBS portfolio pays and what it costs to borrow, or the spread.
The performance of the REIT has been pretty good since its IPO on May 15, 2008. Since that date, AGNC’s total return (with dividends reinvested) has been 464%, which translates to an 11% average annual return over that 16-year period. That’s a slightly better return than the S&P 500 over the same time frame. But AGNC is not being purchased in the portfolio for its performance over the long term.
There are good times to buy AGNC and bad times to buy AGNC. The stock is being targeted now because it is cheap coming off a very bad time ahead of what should be a good time.
Because of the U.S. government agency securities, AGNC has little credit risk. If a buyer defaults, the mortgage is guaranteed by the government. However, there is considerable interest rate risk.
AGNC got clobbered in recent years as inflation and interest rates soared to multi-decade highs. As the Fed raised the short-term interest benchmark, the Fed Funds rate, from 0% to 5.25% to 5.50% in less than a year and a half, AGNC’s borrowing costs soared and profits fell. Mortgage rates rose also but not proportionally as the yield curve inverted curve (short-term rates rise above long-term rates).
From the beginning of 2022 to the end of June 2024, income from the MBS portfolio increased $2 billion but borrowing costs increased $2.3 billion. In the June quarter of this year, AGNC reported net interest income (NII) of -$246 million. That was down from NII of $965 million in 2022 and $1.3 billion in 2021.
The rapidly rising rates also wreaked havoc on the REIT’s book value. As interest rates rise, the value of existing fixed-rate securities falls, because the price is discounted to reflect the new higher interest rates. In 2022 and 2023 AGNC’s book value crashed 45%, from $15.75 per share to $8.70. The stock price tends to be highly correlated to the book value as the chart below illustrates.
An environment of rising interest rates and yield curve inversion is clearly a bad time to be invested in AGNC. The REIT price plunged from over 18 per share in 2021 to just over 10 per share today. But AGNC has since regained some traction. The total return is positive in 2024, and the stock is also trading above its 50-day moving average, a bullish sign. But more importantly, the situation that caused the bad stock performance is reversing.
The Fed has begun cutting rates. Projections from CME Group are that the Fed will cut the Fed Funds rate by 1.75% in the next year. The benchmark ten-year Treasury rate is already falling, and interest rates appear highly likely at this point to continue trending lower in the years ahead.
AGNC’s spread should increase with lower short-term rates and an established portfolio of higher-paying mortgages. The book value should increase as longer-term rates trend lower. The horrible direction of the past few years is going into reverse.
It’s also worth noting that even after the recent 45% price plunge, the long-term returns for AGNC are still a little better than the overall market. That’s because good times tend to offset the bad times.
The biggest attribute of AGNC is the massive dividend yield, currently over 13%. The REIT also pays a dividend every single month. With that high of a payout, and profits looking wobbly of late, is that dividend safe?
Profits have been up and down over the last several quarters, but the changing circumstances are likely to fix that for the better. In the meantime, AGNC pays out about $266.4 million per quarter in dividends and has billions in cash. The REIT can easily ride out another crummy quarter on the way to far better times in the very near future.
AGNC is a great way to get a high monthly income in an uncertain market. AGNC only needs a little bit of appreciation to combine with the 13% dividend to provide a great total return. And appreciation should be likely as the book value rises. It’s worthwhile having a stock in the portfolio that greatly benefits from the imminent phase of the rate cycle.
AGNC Investment Corp. (AGNC)
Next ex-div date: September 30, 2024
AGNC Investment Corporation (AGNC)
Security type: Real Estate Investment Trust (REIT)
Sector: Mortgage
Price: $10.49
52-week range: $6.81 - $10.57
Yield: 13.73%
Profile: AGNC is a mortgage REIT with a portfolio of U.S. government agency mortgage-backed securities.
Positives
- AGNC benefits during Fed rate cutting cycles.
- The stock is cheap because of factors that are reversing.
- It pays a huge yield that should be safe, and stock should appreciate as long-term rates decline.
Risks
- Inflation could come back, and interest rates may remain high for longer than expected.
- The stock price is in a longer-term downward trend.
Sell CEG Dec 20th $260.00 calls at $24.00 or better
Expiration date: December 20
Strike price: $260.00
Call price: $24.00
Constellation Energy Corp. (CEG)
This stock had an enormous 22% upside move yesterday and has moved beyond the highest analyst-targeted price. I do believe in the long-term future of CEG because of the high demand for nuclear energy among technology companies with growing electricity demand. But after such a sharp and sudden move, the stock may be a little ahead of itself. Let’s use the opportunity to lock in a huge call premium and a high possible total return.
Here are the three scenarios.
1. The stock closes above the $260.00 strike price at expiration.
Call premium: $24.00
Dividends: $0.71
Appreciation: $63.86 ($260.00 strike price minus $196.14 purchase price)
Total: $88.57 (total return will be 45.2% in 5 months)
2. The stock price closes below but near our $260 strike price.
Call premium: $24.00
Dividends: $0.71
Total: $24.71 (total income of 12.6% in 5 months)
3. The stock price declines.
There will be $24.71 in income to offset the decline. Plus, the original purchase price is more than $60 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 |
| AGNC Investment Corp | AGNC | 9/24/24 | $10.49 | $12.00 | 13.73% | ||
| Alexandria Real Estate Eq. | ARE | 12/19/23 | $129.54 | $121.25 | $140.00 | 4.29% | -3.48% |
| Cheniere Energy Prtns. | CQP | 7/23/24 | $53.04 | $47.75 | $60.00 | 7.72% | -9.33% |
| Constellation Energy Corp. | CEG | 8/27/24 | $196.14 | $254.98 | $210.00 | 0.55% | 30.00% |
| Enterprise Product Ptnrs. | EPD | 2/27/24 | $27.61 | $29.32 | $30.00 | 7.16% | 10.07% |
| FS KKR Capital Corp. | FSK | 4/23/24 | $19.42 | $19.72 | NA | 14.20% | 9.22% |
| NextEra Energy, Inc. | NEE | 4/25/23 | $77.50 | $82.76 | NA | 2.49% | 11.09% |
| ONEOK, Inc. | OKE | 5/29/24 | $79.59 | $93.97 | $84.00 | 4.21% | 19.49% |
| Qualcomm Inc. | QCOM | 5/5/21 | $134.65 | $168.92 | $180.00 | 2.01% | 35.26% |
| Realty Income Corp. | O | 6/27/23 | $60.19 | $61.63 | NA | 5.13% | 9.88% |
| Open Recommendations | Ticker Symbol | Initial Action | Entry Date | Entry Price | Recent Price | Sell To Price or better | Total Return |
| OKE Oct 18 $87.50 call | OKE241018C00087500 | Sell | 8/27/24 | $3.50 | $7.21 | $3.50 | 4.40% |
| NEE Nov 15 $85 call | NEE241115C00085000 | Sell Pending | $3.37 | $5.00 | 6.45% | ||
| CEG Dec 20 $260 call | CEG241220C00260000 | Sell Pending | $25.40 | $24.00 | 12.24% | ||
| as of close on 09/20/2024 | |||||||
| 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% |
| 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% |
| 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% | |
| 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% | |
Alexandria Real Estate Equities, Inc. (ARE)
Yield: 4.3%
The performance of this life science property REIT has been uninspiring. ARE had a strong surge at the end of last year but it has been rangebound and sideways all year. Since it was added to the portfolio in December of last year, it has only returned -3.48% while the sector benchmark Vanguard Real Estate Index Fund (VNQ) has returned about 14% over the same period. The fundamentals of the business seem to be solid. I’ll wait and see what happens over the next month after the Fed rate cut and the improved interest rate narrative. Hopefully, the good interest rate news and its defensive characteristics in a slowing economy are enough to get ARE moving higher. BUY
Alexandria Real Estate Equities, Inc. (ARE)
Next ex-div date: September 30, 2024
Cheniere Energy Partners, L.P. (CQP)
Yield: 7.7%
The stock has been weak since August mostly because of a fall in natural gas prices. Reports of warmer weather expected and a declining global economy have led to a decline in natural gas prices. 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. Although the price can bounce around with gas prices in the near term, NGL exports continue to grow. (This security generates a K1 form at tax time). BUY
Cheniere Energy Partners (CQP)
Next ex-div date: November 7, 2024, est.
Constellation Energy Corp. (CEG)
Yield: 0.6%
WOW! 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. CEG soared over 22% higher the day of the announcement on Friday. Details of the agreement are yet to be released but management at Constellation says it is the largest electricity purchase in history. It should add to Constellation’s already projected double-digit earnings growth over the next several years. It also confirms the fact that technology companies, which are responsible for the surge in electricity demand, are targeting carbon-free nuclear power. Future increases in business from other big technology companies are now quite likely. BUY
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 17% YTD, 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 the love. Midstream energy companies are not being seen as a turnaround because they have been performing well all along. But they still have the right stuff going forward. EPD tends to be very solid in a turbulent market and should trend higher as more investors opt for dependable income in the increasingly volatile market. (This security generates a K-1 form at tax time.) BUY
Enterprise Product Partners (EPD)
Next ex-div date: October 31, 2024, est.
FS KKR Capital Corporation (FSK)
Yield: 14.2%
This ultra-high-yielding Business Development Company went ex-dividend earlier this 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. 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: December 11, 2024, est.
NextEra Energy, Inc. (NEE)
Yield: 2.5%
This utility has come alive again after a couple of years of subpar performance. Of course, utilities are back in favor, but the resurgence of NEE predates the sector turnaround which began about three months ago. NEE is up 19% since the end of June and 52% since the end of February. NEE had been a market-beating superstar before inflation and rising rates and appears to be returning to form as that situation reverses. 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 30, 2024, est.
ONEOK, Inc. (OKE)
Yield: 4.2%
The prognosis for this midstream energy company changed for the better earlier this month. ONEOK announced $5.9 billion in acquisitions of two companies, pipeline company Enlink Midstream (ENLC) and Medallion Midstream. The deals are expected to close in the fourth quarter and be accretive to earnings immediately. The company conservatively expects a 5% jump in earnings and a 15% increase in cash flow through 2028. It greatly adds presence in the high-growth Permian Basin and adds predictable fee-based business. The market likes the deal as OKE has been making new all-time highs and the stock is up over 38% YTD. HOLD
ONEOK, Inc. (OKE)
Next ex-div date: November 1, 2024, est.
Qualcomm Corp. (QCOM)
Yield: 2.0%
This semiconductor giant has certainly taken some lumps in recent months. It sold off in the first week of this month but has since recovered though. But the stock is still down 28% from the high made in mid-June. Technology has been getting crushed in the recent market, and the AI trade has been losing a lot of its luster. AI could weaken further, but the AI catalyst is not going away. Qualcomm is still 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, and QCOM can easily make up for lost time when it gets hot. BUY
Qualcomm Incorporated (QCOM)
Next ex-div date: December 5, 2024, est.
Realty Income Corp. (O)
Yield: 5.1%
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 over 20% since the beginning of July and is within pennies of the 52-week high after recovering sharply from a brief dip earlier this month. It looks like interest rates were the only thing keeping it down, and falling rates should prop it up. Defensive stocks are going from the worst place to be to the best place to be. HOLD
Realty Income Corporation (O)
Next ex-div date: October 1, 2024
Existing Call Trades
Sell MAIN September 20th $49.40 calls at $2.00 – Expired
Call premium: $2.00
Dividends: $2.06
Appreciation: $3.00 ($49.40 strike price minus $46.40 purchase price)
Total: $7.06 (total return 15.2% in 6 months)
This is a good monthly paying stock that I’m somewhat sorry to lose. It’s less than one dollar above the strike price and we were able to get a high income and a better than 15% return in just six months. Plus, the market is riding high right now because of the Fed rate cut. It might not be a bad time to take profits.
Sell BIPC September 20th $35 calls at $3.00 – Expired
Call premium: $3.00
Dividends: $1.22
Appreciation: $2.36 ($35.00 strike price minus $32.64 purchase price)
Total: $6.58 (total return 20.2% in 7 months)
This stock got red hot and ran away. BIPC is trading more than $7 above the strike price. We still got a great income and a solid total return and there are other similar types of stocks benefiting from the current environment still in the portfolio.
Sell AMT Sep 20th $210 calls at $15.00 – Expired
Call premium: $15.00
Dividends: $3.24
Appreciation: $7.74 ($210.00 strike price minus $202.26 purchase price)
Total: $25.98 (total return 12.8% in 8 months)
This stock got smoking when the REIT rally kicked into another gear. AMT had moved near a recent high after considerable weakness, and instead of pulling back again, it caught fire as the interest rate environment changed for the better. We still got a great income and total return in a short time and there are similar types of stocks still in the portfolio.
Sell OKE Oct 18th $87.50 calls at $3.50 or better
The acquisitions changed the math on this stock. The $5.9 billion on new company acquisitions will be accretive as soon as the deals are closed in the fourth quarter. The market loves it and OKE is still running away. However, the calls don’t expire for nearly a month, and a lot can happen in the market amid two wars and a contentious election.
Sell NEE Nov 15th $85.00 calls at $5.00 or better – Sell Pending
NEE pulled back a little bit last week after a strong move higher earlier this month, and the target call price has not been reached yet. The stock has been recovering over the last couple of trading days and there is a good chance the price is reached this week.
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 October 22, 2024.
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