DCP Midstream Partners LP (DPM) has fallen in price since my original trade. I’m doubling down at the new more attractive price.
music selection: “Forsythia” — Veruca Salt
On Monday, I doubled down on my DPM position. Closing pricing that day was 22.98 and I’ll use that as the reference price. I was able to sell DPM151120P00025000 for 2.80 a contract. If assigned, my net cost basis in shares will be 22.20. Against the 3.12 annual distribution, that is a 14.05 dividend yield. In addition, the annualized yield on my time value sold is 0.78 / 25 / 54 * 365 = 21.09%. As of this writing shares are already back up to 24.33 so having the position expire worthless is still a possibility. Score.
If shares are assigned, I will forgo the usual 10% spread out of the money on covered calls and write calls at the money. This is not the kind of stock that will double in price every 7 years but rather one that has almost all its gains paid out in the distribution. So I prefer to capture income now rather than capture upside appreciation.
DPM is a midstream oil and gas operator that is focused on gas and natural gas liquids. The market has been beating it up with the price of oil. This makes little sense as DPM is largely a toll both operator type operation that is unconcerned with the price of the commodities flowing through its facilities. If anything, depressed prices for natural gas increase quantity demanded and help revenue. The company also has a short but strong history of raising distributions. In fact, there have been 27 distribution raises since 2006! Insiders also hold 23% of shares so management’s interests are well aligned with common shareholders. I remain very bullish on DPM.
Devour your prey raptors!