The Income Opportunity With Pipelines

There is a bang up opportunity for income centric investors to earn a good yield to be paid to wait on capital appreciation.  I am going to add in a layer of covered call options writing to juice this income even further.  The result is a high yield bond like return that has good capital appreciation opportunities.

KMI can be purchased today for about 17.50 a share.The underlying 80 cent distribution yields about 4.5% at that entry price.The share price and distribution can be expected to grow at 10% or greater for the foreseeable future.  Returns can be enhanced by selling an out of the money covered call such as KMI181116C00019000.  Ravenous Lizards playing the home game could expect 9 cents per share for selling this call.  This would result in an immediate additional yield of 5.68%, bringing the total yield to over 10%.  This is a good rate to be paid to wait for capital appreciation.  Note that in the unlikely event shares are called away at 19 in 33 days, the annualized yield jumps to 97.74%.  This is fair compensation for potentially giving up additional upside in the stock.

Strategies like this allowed me to retire early at the age of 40 on a withdrawal rate of almost 10%.  Portfolio growth, driven by producing income rather than capital gains, since that time, has allowed me to get my withdrawal rate well under 6%.  I feel 6% is a good sustainable target for income investors to retire early and expect to stay ahead of inflation.  Market downturns matter little with this kind of investing.  My 12 month projected dividends, distribution, and interest income comes to 118.34% of my budget.  This type of investing ensures you will never have to “sell low” during a market downturn.  You are being paid by the markets to be a patient predator.

A little housekeeping, I was assigned shares of ABBV over the weekend at 94.  I am happy with this outcome as ABBV is a fine company with great future earning prospects and fat option premiums that I can use to extract income while I wait for price recovery.  To that end, I sold ABBV181123C00095000 for 1.90 a share.  Against my cost basis of 94, the trade has an expected annualized return of 18.44% over 40 days.  This is an excellent income rate that further supports my need for income (my options income covers my budget by an approximate 150% above and beyond my passive income).  I will put it out there that if shares rally to my strike of 95, the additional dollar of short term capital gains will bring my annualized return to 28.15%.  A lizard can’t complain with returns like that.  It is also worth mentioning that even though the position moved against me and resulted in assignment, I am up 2.33% on the position to date after accounting for all options premiums earned.  I remain eligible for the underlying 4.23% dividend yield.  This leaves me a happy lizard.

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