Market Top Coming: 10 Safe High-Income Opportunities

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Includes: AAPL, ACWX, EEM, EFA, HCN, IWD, MU, NRZ, O, OHI, QQQ, SPG, TOO, TSLA, VNQ, VZ, XLK
by: Blue Harbinger

Summary

The multi-year stock market rally is starting to flash serious signs of capitulation as central banks continue to tighten.

The growth and technology stocks that have led markets higher for years are starting to deliver negative returns, and they are recently under-performing the rest of the market.

This article highlights 10 specific high-income opportunities, broken down into five dividend opportunities and then five income-generating options trading opportunities.

The objective of this article is simply to provide "food for thought", and every investor should always consider their own personal investment situation, goals, and tolerance for risk.

According to Bank of America’s chief investment strategist Michael Hartnett, it’s “no longer politically acceptable (for central banks) to stoke (the) Wall St. bubble,” likely setting up for a “big top” in stock markets this fall.
We believe the stock market is going much, much higher over the long term, but we also know many investors simply cannot stomach short- and intermediate-term volatility and thereby prefer to focus their investments on safe income-generating opportunities instead of simply very long-term capital appreciation.

This article highlights 10 specific income-generating investment opportunities, broken down into five dividend opportunities and then five income-generating options trading opportunities. The article is intended simply to provide “food for thought” for income-focused investors, and every investor should always consider their own personal investment situation, goals, and tolerance for risk.

Before getting into the 10 high-income opportunities, it is helpful to examine the current state of the market in terms of a narrative and then actual data. The narrative is that central banks are reducing the easy monetary policies (low interest rates, quantitative easing) that helped lead the world out of the 2008-2009 financial crisis. And, as the volume of that narrative increases, the data show the multi-year market rally is flashing serious signs of capitulation. For example, consider the data in the following table.

Specifically, we see three groups of data that strongly support the narrative that the rally is capitulating. First, growth (IWD) and technology (QQQ) (XLK) stocks have been underperforming the rest of the market over the last week and the last month. And, as the data in the above chart show, this is the exact opposite of what has happened over the last one, three, and five years. And, this data fits the narrative that the Fed’s extended period of easy money (which favors growth and technology stocks) is expected to dissipate (i.e. the market is forward-looking).

Second, international (non-US) stocks (EEM) (EFA) (ACWX) have been beating US stocks so far this year, and this is the exact opposite of what has happened over the last three and five years. And, as the narrative goes, the US led the world into the financial crisis, and it has led the world out of it too. And, considering the "connectedness" of global markets, it would have been unreasonable for US central bank monetary policies to be drastically different (drastically more hawkish) than non-US monetary policies (i.e. even if the US wanted to tighten more, sooner, it would have been unreasonable because the rest of the world was still easing to deal with more challenged economic conditions). And, now that the rest of world is stronger (or at least expected to be per strong international equity market performance), it makes sense for the US to tighten monetary policies further. And, the data fits this narrative.

Third, highly-levered and high-dividend-paying REITs (VNQ) have been underperforming the rest of the market over the last week, month and year, and this is both a signal and an opportunity. First, it is a signal that REITs, which rely on debt to grow, will likely face more expensive financing costs in the years ahead as interest rates rise. However, this is also an opportunity, because not all REITs are created equally (the weak will struggle, the strong will flourish), and the recent REIT sell-off (see the chart above) has created an attractive opportunity to invest in select REITs that have inappropriately sold off (more on this later).

And, with that qualitative and quantitative backdrop in mind, our first set of five high-income opportunities is focused on dividends, as follows.

5 Attractive Dividend Investments to Consider

1. Welltower (HCN), Yield: 4.8%
Welltower is a big-dividend, blue chip, healthcare REIT that is well-diversified across senior housing (triple-net and operating), outpatient medical, and long-term post-acute. And, as the following chart shows, its shares have performed poorly over the last year and especially over the last week.
The narrative against Welltower is that not only will it face the same challenges as REITs in general as described earlier (i.e. rising interest rates will make it more expensive for HCN to grow) but also the company faces unique challenges related to efforts in the US to repeal and replace Obamacare (i.e. a lot of the customers of Welltower’s tenants rely on government-sponsored reimbursement, which could be reduced under changes to the law).

However, despite the challenges, Welltower’s price to FFO has dropped to a compelling level, its dividend is very well covered, and the long-term demographic trends (i.e. a growing population of healthcare needs) are strongly in favor of the company over the long term, in our view. Plus the big dividend yield and value stock status of Welltower put it right in the sweet spot of a market style shift that we expect to strengthen over time (i.e. the market's long-term reversion to favor income/value stocks over growth stocks). For your reference, you can view our earlier, more detailed, write-up on Welltower within this report.

2. Verizon (VZ), Yield: 5.3%
Verizon is another stock that we expect to benefit from the long-term reversion to a market that favors value and income stocks over growth stocks. And, given Verizon’s recent underperformance (as shown in the following chart), now is an excellent time to consider investing from a contrarian standpoint.
Clearly, Verizon has faced challenges in recent years, ranging from the slow death of wirelines to the slowing growth of wireless, and more recently to the troubled acquisition of Yahoo. However, the company still generates lots of free cash flow to support the dividend. Plus, we believe it has been taking appropriate steps (such as the Yahoo acquisition) to transform itself to be more relevant in a continually evolving marketplace. We’ve written about Verizon several times this year (for example, here, here, and here). And, considering its recent poor performance, combined with market conditions that we believe will favor value and income stocks (i.e. the end of easy money by the Fed), we believe Verizon is an attractive “Dog of the Dow” that is worth considering.

3. Teekay Offshore Series-B Preferred Shares (TOO-B), Yield: 11.6%
Shifting gears from common stocks to preferred stocks, we believe the preferred shares of marine transportation company Teekay Offshore (TOO) are worth considering. Not only is the dividend big and safe (i.e. we believe the company has plenty of financial wherewithal to support the dividend) but we also believe market conditions favor this company going forward because it will benefit as the market shifts from growth to value stocks. Further, we believe the maritime shipping industry is showing signs of improvement and continued recovery. You can read more about our views on Teekay in our recent preferred stock article, and if you’re looking for big safe yield that will benefit from current market conditions, then Teekay preferred series B is worth considering.

4. New Residential (NRZ), Yield 13.1%
New Residential is a big dividend REIT that invests in mortgage-backed securities, and we believe now is an attractive time to consider investing considering it just raised its dividend. But the shares are down over the last two weeks as shown in the following chart.
It may seem counterintuitive to invest in anything “residential mortgage related” right now considering interest rates are expected to continue rising and that will make it more expensive to buy a residence with a mortgage. However, NRZ owns powerful Mortgage Servicing Rights (“MSRs”) giving it the right to service a pool of mortgage loans in exchange for a fee, and NRZ's MSRs have the ability to continue delivering big returns (12-20%) despite our current rising interest rate environment. In fact, as interest rates rise, less people prepay their mortgages thereby allowing NRZ to collect income on its MSRs for an even longer period of time (i.e. this is a good thing). If you are looking for an attractive high-income opportunity in our current rising interest rate environment, New Residential is worth considering (for reference, you can view our earlier, more detailed write-up on NRZ here).

5. Realty Income (O), Yield: 4.7%
Another high income opportunity that investors may want to consider is Realty Income. Not only has this REIT sold off over the last year as rising interest rates stoked fears of more expensive and challenging growth but also value and income investments in general have been out of favor as growth stocks have been dominating over the last year (as shown in our earlier table).
We believe the market narrative has driven Realty Income’s price too low, and it now presents an attractive opportunity for income investors. Specifically, Realty Income is a large steady REIT that invests in commercial and retail properties across the US. And, as fears of retail challenges have spooked investors, Realty Income has sold off hard.

However, the company has a reasonable level of leverage and plenty of liquidity to keep supporting its big growing monthly dividend payments which have now been increased for 78 quarters in a row. We wrote about Realty Income earlier this year, and we believe it remains a particularly attractive opportunity for income investors now.

For your reference, before we move to the next section of this report, if you are interested in more attractive big safe high-income ideas, consider our members-only report: Market Top Coming (Part 2): 10 More Attractive High-Income Opportunities. This version includes 10 more big safe dividend/income opportunities, and we do currently have open positions in six of the companies on the list.

Five attractive high-income options opportunities
Switching gears from dividend investments, the next five high-income opportunities are focused on income-generating options trades. And, given current market conditions (i.e. growing fears that the market is topping), these five opportunities take some of the market risk out of the equation but still provide an attractive differentiated source of income. These options trading strategies are absolutely not for everyone, but for those of you inclined, here are five specific opportunities that we believe are worth considering.

1. Simon Property Group (SPG), Selling Put Options
Returning to our REIT focus, the premium income available for selling insurance (put options) on Simon Property Group is an attractive way to generate income considering current market conditions.

Specifically, SPG is another retail REIT that has been caught up in the narrative that all “brick and mortar” stores will be put out of business by the Internet. In reality, that is absolutely not true, and the “cream of the crop” retail properties owned by Simon Property Group allow the company to thrive. Not only does SPG continue to set financial records year after year, but its dividend is very safe and growing, and its stock price also is very attractive as we recently shared our views in this SPG video update.

Nonetheless, we understand some investors believe Simon Property Group may still fall further, and that’s why we are sharing our SPG income-generating option trade idea. In fact, we recently sold put options on SPG (about one month) ago. Specifically, we sold SPG puts expiring on July 21st for a premium of $0.96. As a general characteristic, the premium income available for selling puts increases when the stock price is falling and fear is increasing. And, this was the case when we sold our puts, and it is again the case as SPG’s stock price has fallen sharply over the last several days.
We believe SPG is an attractive long-term investment. We are happy to collect premium income up front for selling put options, and we’re also happy to buy the shares at an even lower price if they do get put to us before the options expire. This strategy is absolutely not for everyone, but if you are an income-focused investor worried about the price of quality investments falling further, this strategy may be worth considering. We’ve recently sold SPG puts.

2. Tesla Motors (TSLA), Selling Put Options
Market sentiment on Tesla Motors is currently very negative. For example, short interest has recently been hovering close to 20%. And, similar to when Tesla released its Model X SUV, we may be about to witness an extreme “buy the rumor, sell the news” phenomenon as the company prepares to release its long-awaited Model 3 in a matter of weeks (i.e. the price rises leading up to the release as investors buy the rumor of its greatness, and then the shares sell off after the release as the excitement and anticipation wears off). And, what makes Tesla particularly interesting to us is that the premium income for selling puts is very big. For example, as the following chart shows, by selling insurance (selling put options) that are 22% out of the money (a $240 strike price) that expire in just over a month, you can generate an annualized income (premium) of around 10%.
If you are interested in potentially owning shares of Tesla at a much lower price and generating some significant upfront income now, then these puts are worth considering.

3. Micron Technology (MU), Selling Put Options
Micron is involved in the semiconductor systems business, it pays zero dividends, and its revenues and profits have been ramping up dramatically in recent quarters. And, if you like the idea of investing in a high growth company, but you also like income and you don’t want to buy in after a rally, then selling Micron put options may be an attractive option for you. And, in particular, the share price has started to pull back in recent weeks (as part of the broader growth/technology sector pullback we’ve been experiencing), and this may be providing an increasingly attractive opportunity to generate income by selling put options as shown in the following table.
Specifically, you can generate a very large $0.39 in income premium for selling puts on Micron that are 13.6% out of the money and expire in just over a month (this amounts to a double-digit income yield on an annualized basis).

We like Micron because we believe its NAND-based solid state drives have a lot of room for growth as data and data centers grow. Further, the price pullback in recent weeks may be providing just enough buffer and fear to enter a put options trade that will generate attractive income now and give you the opportunity to possibly own shares at a lower price in the future. Again, this type of trade is not for everyone. But if you are an income-focused value investor, and you like Micron’s long-term prospects, this trade may be worth considering.

4. Apple (AAPL), Selling Put Options
Apple’s share price has pulled back lately, and its shares are attractively priced on a price-to-earnings basis, in our view, as shown in the following chart.
The company continues to have a long runway for profits in its iPhone business, but as one of the large-cap growth stocks that has come under increasing pressure lately, the shares may have more near-term under-performance ahead. If you are an income-focused investor, and you believe in Apple’s business, you may want to consider selling puts.
As the above chart shows, you can generate a healthy $1.16 in premium income now for selling put options with a strike price of $130 that expire in just over one month. And, not only do these puts provide extra income now, they also give you an opportunity to own a high-quality blue-chip stock (Apple) at an even lower market price.

5. Omega Healthcare (OHI), Selling Put Options
Another healthcare REIT that presents attractive premium income for selling puts is Omega Healthcare Investors (OHI). Omega operates in the skilled nursing facilities space, an area with much uncertainty related to possible upcoming Affordable Care Act changes (particularly the possibility of reduced reimbursements rates). We’ve written about Omega and its risks in the past (for example, here and here). And, for reference, here is a snapshot of the premium income available for selling OHI put options.
We don’t currently have any open options positions in Omega, but we do own shares. However, we do believe the $28 strike price July expiration options are attractive and worth considering because they provide attractive income up front and the potential to own these attractive shares at an even lower price in the near future.

Conclusion
We believe the multi-year growth and technology stock rally is showing signs of capitulation as central banks continue to tighten monetary policies. We also believe these current market conditions have created attractive opportunities for income-focused investors such as the 10 described in this article. And, if you are interested in more attractive big safe high-income opportunities, consider our members-only report: Market Top Coming (Part 2): 10 More Attractive High-Income Opportunities. This version includes 10 more big safe dividend/income opportunities, and we do currently have open positions in six of the companies on the members-only list. Finally, and most importantly, the ideas presented in this series are intended only as “food for thought.” All investors should consider their personal situation, goals, and tolerance for risk before investing.

Disclosure: I am/we are long OHI, NRZ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: we are short SPG put options.

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