Hi Miraje,
To my surprise, they seldom ever get discussed. On my 1099 year end recap they are treated as "non dividend distributions".
They are a tax free return of capital.
Usually the first quarter is a qualified dividend. The second quarter is a partial qualified dividend and a partial return of capital. Then Q 3 and Q 4 have been all return of capital.
The Dollars returned are reflected in a reduced cost basis of the shares you owned during that quarter. If you are increasing your share count it gets a bit confusing. In the beginning I tracked it and it is reduced appropriately. I no longer go thru the calculation, I just trust it. If you bought more shares just before the ex-dividend it can be a tracking pain. As it comes out on the 1099, It is comes out correct.
Of course when you sell out, it generates a tax event that is increased by the lower cost basis, but that assures it is taxed at a lower rate long term capital gains. Max rate of 20% with a possible Obama tax of 4.3% if your joint income exceeds 727,000 in 2024.
I think it is a feature of it being in the midstream business, but being a C-Corp, it gets the qualified dividend treatment and or return of capital treatment vs. the higher tax rates that apply on Limited Partnerships.
Upon first noting it on my 1099 I was leery of it, but now I get over $100,000 back tax free every year.
In effect, I sell puts on KMI 17's, 16's, 15's and with the hope of getting the 17's assigned. When and if that happens it bumps my average up a bit and the return of capital brings my overall average back down.
Lately KMI has been steady around 17 to 18 and I have not been selling any puts. When KMI is below 17,I'll sell 17.00 puts if they get to 1.30. If assigned my net purchase price is 15.70. That brings the combined dividend/return of capital to 7.5% and if it dips near $16.00, it will yield over 8%. If it gets below 16, I'll buy it outright.
It's a double every 9 years if over an 8% yield.
When KMI dips I'll sell 20 17's hoping they get assigned. Double down on 16's and triple down on 15's - hoping they expire to 00.00 and I keep the cash and use it to help pay for the assigned 17's.
I'll go out 12 to 14 months and max out the time premium.
I then let time decay do its thing - "In Time Decay I Trust". If it dips to below 17,I'll begin selling puts and stagger them 90 days apart in expiration.
Last year it dipped in the 15's and I got 2000 shares assigned on sold 20 17 puts and sold several hundred 16's and 15's, 14's and 13's contracts and yielded about $40,000 in cash through expiration. It takes a lot of cash as collateral, but yields up to 10-12 percent annualized. If assigned and the current dividend is held (it has been increased the last 5 or so years by 2 cents the last 2 years - 2024 it is $1.17). A 40 cent premium on a 15 put = a net purchase price of $14.60 and a dividend yield of 8% +.and more than half of that is not taxed.
That is much better than any treasury offers and at half the tax rate!
If I live 8 years and retain the position, I'm on a double in revenue and won't trigger a taxable event until sold. My wife has assured income. If I can stay on top of the soil for 16 or 24 years, my two nephews will inherit a cash cow and get a stepped up cost basis, and have their kids education paid for while rooming in a condo that is paid for and give them revenue while at school!
Now I've been doing that for the last 7 or 8 years already. KMI is my largest share count holding. It is one of those boring huge cashflow cows. They have reduced debt to below their target as of last year. They say they will be acquisitive of opportunistic on share buy back plans going forward.
I'll cash in my Treasurys, and sell puts on KMI, the next market dip, if KMI gets below 17 again. It has managed to do so after getting to 20.ish in 2020.
Just collecting dividends now as I let all the sold puts expire just this last January.
They transport 70 percent of the US's natural gas consumption and transport 50% of the LNG exports to the global markets. A very stable business, with much of their system in Texas and the Permian shale deposits (which become more gassy as crude is extracted).
IMO, they are a utility like dividend payer, with a better chance at export growth than the average utility..
It has worked as expected for me.
It takes the worry out of market swings. I get to keep the cash if it doesn't get assigned. OR I get to buy the stock at a reduced price and get dividends for the long run at a yield on cost over 8%. I'll take either alternative and not worry about the market. I'm sleeping well at night and OK with either event. I actually now believe that getting assigned the shares is really a function of being lucky in that I arbitrarily sell the puts on expiration months that by luck need to coincide with a market corrective wave.
The hard part is being patient and waiting for a dip in the market for timing the put sell at maximum premium.
During a longer decline, the premium can actually triple on a 15 or 13. put.
That's why I track daily Don Wolanchuk's CLX data. It is the best timing device for waiting for market bottom sell offs I've found.
Hope to see you at the KMI thread. Pretty quiet there, but E_K_S, drops by there quite regularly. He's excellent on dividend stocks.
I'll often post my put sells over on the option strategies thread. It is seldom posted there also, but sm1th and I post our sold put trades on real time basis there.
Quite sure natural gas will be used for heating and electricity generation in the far out future.
If not in the US, it will still be used in the emerging markets.
I hope that helps.
Bob |
