Kinder Morgan Looks Like a Safe High-Yield Bet for Value Investors

Kinder Morgan (KMI), the pipeline and oil and gas storage company, has a 6.1% dividend yield that is attractive to high-yield value investors. Management recently raised the dividend as well for 2023. In addition, to earn more income some investors short its out-of-the-money (OTM) puts and covered calls.

Kinder Morgan is expected to earn $1.15 in earnings per share (EPS) this year and $1.14 next year through its energy transportation infrastructure operations. This more than covers its annual dividend of $1.11 per share.

Moreover, Kinder Morgan has consistently raised its dividend for the past 5 years, according to Seeking Alpha. On Dec. 7, the company announced that its dividend for 2023 will be $1.13 per share. So that raises the dividend yield today to 6.23% at today's price (Dec. 24) of 18.14 per share.

They also projected in the 2023 Financial Expectations statement that distributable cash flow (DCF) will be $2.13 per share, which shows that the dividend is more than covered by cash flow.

On top of this management has been buying back its shares. This helps to increase its EPS and dividends per share, as there are fewer shares outstanding.

As a result of these positive developments, the stock is up almost 1.9% in the last week. Some value investors are now shorting covered calls and cash-secured puts that are both out-of-the-money (OTM).

Shorting OTM Puts and Calls

For example, the Jan. 27, 2023, $19.50 strike price calls, which are 7.50% over today's price, have a decent premium of 12 cents per call option contract. That works out to an immediate yield of 0.66%.

This means that if an investor buys 100 shares at $18.14 today for $1,814 and then puts in an order to “sell to open" 1 call contract at $19.50, the account will receive $12 per contract. That works out to a yield of 0.66% (i.e., $12/$1,814), and, on an annualized basis it is 7.93%. If the stock moves up to $19.50 or higher by Jan. 27, the investor will have the stock called or sold at $19.50, making a 7.50% capital gain based on the underlying 100 shares that were bought at $18.14.

Moreover, shorting OTM puts at $17.00, which is 6.28% below today's price of $18.14, trade for 22 cents. That works out to a short put yield of 1.29% (i.e., $0.22/$17.00). To be even more conservative, the $16.50 puts, which are 9.0% below today's price, still trade for 13 cents per put option. That represents an immediate yield of 0.788% or an annualized return of 9.45%.

This means that if the investor puts up $1,650 in cash or margin with the brokerage firm, the investor can put in an order to “sell to open” the $16.50 strike put. He will immediately receive $13 in his account for every put option sold. That works out to 0.7878% (i.e., $13/$1,650), or 13.45% on an annualized basis. However, the investor cannot make an unrealized or realized capital gain as the covered call investor can.

Nevertheless, these are two ways to enhance the income an investor in KMI stock can make using covered calls and cash-secured puts.

• Stocks Stabilize on Improved U.S. Inflation Outlook
• "Hi-ho, Silver! Away!"
• Stocks Stabilize after Positive U.S. Inflation News
• Markets Today: Stocks Slightly Higher after Positive U.S. Inflation News