Investing Smart In Brookfield Infrastructure Partners With Options

Introduction

The primary reason why Belgian (retail) investors avoid foreign investments is the 'home bias' syndrome. However, there's another factor which comes into play: withholding taxes related to dividend distributions.

For example, a Belgian investor retains roughly 50% of his/her US dividends, forcing him/her to stick primarily to non-dividend paying stocks and the Belgian stock market. That doesn't speak favorably in an environment where valuations are looking stretched, COVID-19 uncertainty surrounding over-leveraged businesses, and ETFs being dominated by a handful of mega caps.

How can we not only avoid dividend withholding taxes, but invest safely in, for example, "Real Assets?"

Brookfield Infrastructure Partners (BIP): The Right Stock at The Right Time

Source

Source

There are very few investment vehicles that come even close to BIP's best-in-class management, track record, and business resilience during the COVID-19 pandemic. Its unmatched distribution growth rate of 11% over the past 11 years and broad cash flow basis allow for further dividend hikes.

The 4.5% Dividend Yield is Appealing; Unfortunately Not For Everybody

Essentially, BIP is a utility offering a juicy dividend yield of 4.53%. How can Belgian investors circumvent the dividend withholding taxes while at the same time lock in upside potential and additional cost-basis reduction. How do we get the 3-in-1? Quite simple: sell an in-the-money put.

Sideways Option Strategy

• Sell the $50 put expiring in March 2021 (for $10.3) (cash-secured).
• Sell the $45 call expiring in March 2021 (for $3.70).

This is a seven-month trade setup allowing for the following outcomes at expiration. With BIP's stock trading at $42.82 and an aggregate dividend distribution of 3 x $0.485, the option strategy has a breakeven point of $36 and makes 10% between $41 and $54. On an annualized basis, these returns would have been even greater.

(Source: Option Generator Research)

(Source: Option Generator Research)

Below, you can find the P&L per one lot (1 put and 1 call contract) at expiration in March 2021.

(Source: Option Generator Research)

Bullish Option Strategy

If you are bullish on BIP, you can take a look at the following setup:

• Sell the $50 put expiring in March 2021 (for $10.3) (cash-secured).
• Sell the $50 call expiring in March 2021 (for $1.20).

(Source: Option Generator Research)

(Source: Option Generator Research)

(Source: Option Generator Research)

In-The-Money Covered Call Option Strategy

Let's take a look at an in-the-money covered call strategy:

• Buying 100 shares of BIP.
• Selling the March 2021 in-the-money covered call for $6.
• Dividend capture of 3 x $48.5.

Compared to the sideways strategy, the in-the-money covered call write does not allow for 20+ % returns, but holds a 11%-12% gain as longs as we stay above the strike price of $40. Foreign investors - for example, Belgians - would see their final return decrease by roughly 2% because of dividend taxes.

(Source: Option Generator Research)

(Source: Option Generator Research)

(Source: Option Generator Research)

Conclusion

By implementing a relatively simple option strategy, foreign investors are able to circumnavigate huge dividend withholding taxes. Most importantly, the risk-reward profile has changed favorably, resulting in a higher probability of profit and less volatility in our P&L.