Can you get income…from an Artificial Intelligence (AI) play? What about rental housing…without the hassle of being a landlord yourself? Or how about coal…a commodity many thought the world was leaving behind? Learn about these “off the beaten path” income opportunities from a trio of top MoneyShow contributors. You’ll be surprised where there are payouts to be had.

Elliott Gue Energy and Income Advisor

The good news from all the companies I follow reporting so far is they’re healthy on the inside and are on track for growth in 2024. That means they’re all still worthy of building positions in, at least so long as they’re trading below our highest recommended entry points. Meanwhile, I like coal, oil, and natural gas producer Alliance Resource Partners (ARLP) here.

Alliance has been an MLP since the late 1990s, becoming one of a handful to eliminate incentive distribution rights when it bought in general partner Alliance GP Holdings in June 2018. As a mining company, cash flows have by nature varied with commodity prices over the years, particularly its main product coal.

Yet because of its reliance on long-term contracts with financially secure US electric utilities at fixed prices, dividends have actually varied relatively little up until the past decade or so. That’s when the North American shale revolution suddenly unlocked abundant and cheap supplies of natural gas.

With the coal power plant fleet aging and pollution controls increasingly expensive, US utilities began to switch en masse. As coal plants have closed, the long-term contracts that sustained Alliance’s dividend stability have expired or more rarely been bought out. The company’s mines are still performing competitively. But the revenue base has now shifted from nearby utilities to overseas power producers. And as a result, volatility in selling prices, cash flow, and by extension, dividends, has increased.

Alliance’s current quarterly dividend of 70 cents a share is an all-time high. And it’s nearly 30 percent more than what the company paid in late 2019, just before management eliminated the payout for over a year due to weak commodity prices.

Quarterly results haven’t lost their volatility. Alliance reported an 11.2% decline in Q4 revenue, largely due to a 10.7% drop in coal sales per ton due to lower Illinois Basin export pricing. That took down segment adjusted EBITDA by 35.5%.

Nonetheless, Alliance was still able to report dividend coverage of 1.31 times. Aggressive use of free cash flow for deleveraging has cut debt to EBITDA to just 0.3 times as of the end of 2023. And management reports “over 90%” of 2024 coal output guidance of 34 to 35.8 million short tons is both “committed” to buyers and at prices “similar” to 2023.

Selling prices for coal—and to a lesser extent oil and gas from royalty interests—will be key for maintaining the current level of dividends. And the exceptionally high current yield of 14% on Alliance stock reflects investor skepticism they’ll hold near current levels this year.

With Alliance shares arguably pricing in as much as a 50% dividend cut, there’s a strong argument to make for a snapback rally to at least the mid-20s later this year, especially if commodity prices do firm as we expect.

Recommended Action: Buy ARLP.

Kenneth Leon CFRA Research

American Homes 4 Rent (AMH) carries CFRA’s highest recommendation of “Strong Buy.” AMH properties appeal to households migrating from high-rise properties and high-cost states. Unlike the highly competitive multi-family residential market, we think AMH is best positioned in the single-family homes for rent (SFHR) market, which is benefiting from a major housing shortage and challenges of affordability to own a home.

With 58,470 homes for lease in 22 states across the country as of Dec. 31, AMH is meeting changing lifestyle demands by providing residents access to updated homes with features they value, such as proximity to jobs and access to good schools. The trust strives toward establishing “American Homes 4 Rent” as a nationally recognized brand that stands for quality, value, and tenant satisfaction.

We think these qualities should help attract and retain tenants and qualified personnel, as well as support higher rental rates. As of Dec. 31, the breakdown of the 58,470 single-family properties is: 55,768 occupied single-family properties, 251 stabilized properties, 398 non-stabilized properties, and 2,053 held for sale and other properties.

At year-end 2023, nearly 65% of AMH’s properties in operation were concentrated in five states: Texas, North Carolina, Florida, Georgia, and Tennessee. Management says property values and operating fundamentals for single-family properties in these markets will improve significantly over the next few years.

In 2024, AMH guides for Funds From Operations of $1.70-$1.76 per share. In Q4 2023, rental revenues rose 7.3% and cash net operating income (NOI) was up 6%. While multi-family REITs face flat Y/Y cash NOI in 2024, AMH guides for up to 5% cash NOI growth.

In 2024, the trust intends to acquire $700 million-$800 million in homes and develop $100 million-$150 million in homes, partly funded by disposing of $500 million in noncore homes. In Q4 2023, AMH’s blended rental rates rose 5.7% Y/Y to a record $2,112 monthly, with new lease rates +4.5% Y/Y and renewal rates +6.2%.

As of Dec. 31, AMH’s total debt to total capital ratio was 36.9% compared to 38.7% at the end of 2022 and 36.7% at the end of 2021. On total debt outstanding of $4.52 billion, the trust has debt maturing $949 million in 2024, $10 million in 2025, and $100 million in 2026. The weighted average interest rate is 4.05%.

The trust has $59 million in cash equivalents and $1.25 billion in unused capacity of its credit revolver facilities. Our 12-month target price is $40 using a forward P/FFO of 22.9x our 2024 FFO view, above the peer average of 19.0x given AMH’s premier markets.

Recommended Action: Buy AMH.

Brett Owens Contrarian Income Report

AI stocks are booming – but they’re an absolute “dividend desert” for us contrarian income-seekers. Or are they? What if we could find a way to grab more of our AI profits as dividends – particularly growing dividends – so we don’t have to “buy and hope” for price gains alone? We can if we employ a “pick and shovel” approach, and one stock I like is Sempra

SRE
(
SRE), advises Brett Owens.

Most tech stocks – and I’d put AI darling Nvidia (NVDA), with its pathetic 0.02% yield, at the top of the list here – don’t pay dividends when they’re growing quickly. Only later, when growth slows, do they “find religion” and return cash to shareholders as dividends and buybacks. That’s too bad for those of us who like to have more than one way – price gains – to book returns on our stocks.

That said, during the gold rush of the 1840s, hordes flocked to California to get rich mining for gold. But the guys who made the real money didn’t actually mine anything. They were the entrepreneurs who sold the picks and shovels (as well as booze and lodging) to the hapless speculators.

SRE is an ideal pick and shovel play on the AI boom. It’s a California- (and Texas-) based utility set to profit as AI drives power demand through the roof—to 85 terawatts a year by 2027, according to Scientific American. That’s more power than many small countries use.

Let’s start with California, where Sempra has 25 million customers in the southern and central parts of the state. Despite recent tech layoffs, California created 260,000 jobs in 2023, according to the Public Policy Institute of California, a rate that matched pre-pandemic levels.

But Texas, where Sempra has 13 million customers and operates 143,000 miles of transmission lines, is the real growth driver here.

The state’s tech sector is en fuego. According to the Texas Economic Development Corporation, 17,600 tech firms now call Texas home, and they employ some 203,700 workers there. In Austin alone, the number of tech jobs jumped 9.8% in 2022, according to the city’s chamber of commerce.

All of this builds a strong case for Sempra, and its stellar earnings history drives the point home. Management continuously sets a 6% to 8% EPS growth target…and continuously crushes it.

No wonder the payout (recent yield: 3.5%) is on a growth tear and it has pulled up the share price with it, too. That connection is a phenomenon I call the “Dividend Magnet” – and we’ve seen it in dividend stock after dividend stock.

Recommended Action: Buy SRE

Michele Schneider MarketGauge.com | Kenny Polcari SlateStone Wealth

Mish Schneider is chief strategist at MarketGauge.com and Kenny Polcari is chief market strategist at SlateStone Wealth. Both sat down with me at the 2024 MoneyShow/TradersEXPO Las Vegas to share their take on stocks, sectors, commodities, and more in this MoneyShow MoneyMasters Podcast twofer.

In the episode, which you can watch here, Mish kicks things off by sharing her “still photograph” theory on the markets and the economy, noting that “everything’s pretty good” with earnings, interest rates, and growth stocks, even if we have issues with government debt and lingering inflation.

She doesn’t think the Federal Reserve is going to cut rates a bunch in 2024, but remains firmly in the “no landing” camp on the economy regardless. When it comes to market opportunities, she thinks the “all about me” trend will create opportunities in sectors like consumer discretionary and biotechnology, while gold, silver, copper, and other commodities may have “Supercycle potential.”

Next, Kenny lays out his case for why the Fed should not cut rates AT ALL this year – and that from a historical perspective, there’s nothing wrong with them hanging around 5%-5.5%. Markets can handle it. He expects some near-term chop and consolidation after the big run and valuation ramp we’ve had in groups like technology, but cautions investors not to overreact to it.

Kenny then goes on to explain why he likes healthcare and industrials, and why small and mid caps could be poised for a nice move. He then lays out his case for why the S&P 500 should finish the year up at least 10% – and why investors should be buying for the long-term if election or geopolitical headlines create short-term chaos.

Read the full article here

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