For years, investors looking for a compelling dividend investment likely came across Kinder Morgan (KMI +0.16%) at least once. As the owner of the nation's largest network of natural gas pipelines and storage infrastructure, it provides an essential service with lots of competitive advantages. Recently, though, the company's dividend has looked less interesting as management was forced to cut it by 75% back in 2015 because of too much debt and a large bill for growth projects coming due. While management has recently announced plans to get the company's payout back on track, its dividend still yields a much more modest 2.8% today.
Investors may be fine with that kind of yield, but there are larger dividend checks out there. We asked three Motley Fool investors to each highlight a stock with a higher yield than Kinder Morgan that they see as a great investment. Here's why they picked Pfizer (PFE +0.35%), Magellan Midstream Partners (MMP +0.00%), and Omega Healthcare Investors, Inc. (OHI +2.42%).
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A pharma giant with big dividends
Dan Caplinger (Pfizer): The pharmaceutical industry has done a good job of rewarding investors with generous dividends over time, and as one of the giants of the industry, Pfizer has had more success than many of its rivals. With a 3.4% dividend yield, Pfizer outpays Kinder Morgan by a decent margin. The stock has also done a good job in recent years with dividend growth, doubling its quarterly payout since 2009, with eight straight annual boosts.
Pfizer struggled after it lost patent protection on its blockbuster cholesterol drug Lipitor, cutting its dividend during the financial crisis in order to reinvest more money into growing its business. As painful as that was for dividend investors, Pfizer's strategy has paid off, and the company is much more secure financially, as a result. Pfizer has more than two dozen late-stage clinical programs going on right now, setting the stage for some new high-growth drugs if studies go well and the drugmaker can earn Federal Drug Administration approval.
Even though Pfizer has developed new growth prospects, its valuation of just over 13 times forward earnings estimates for 2018 is relatively inexpensive compared with many of its peers. That combination of value and current income gives Pfizer a solid opportunity for income investors to tap into a blue chip stock at the top of its game.
Same business, bigger dividend checks
Tyler Crowe (Magellan Midstream Partners): The industry in which Kinder Morgan operates is one that is ideal for high-paying dividends. Pipelines and other infrastructure for oil and gas is a business that generates steady revenue and cash flow with minimal maintenance capital requirements. There are dozens of companies that play in this sandbox, and each share these traits to a certain degree. What really separates a company in this business, though, is the management team, and how good it is at being stewards of shareholder capital.
That, more than anything else, is what makes Magellan Midstream Partners one of the best in the oil and gas infrastructure business. Like Kinder Morgan and so many others, a vast majority of Magellan's revenue comes from fixed fee contracts to deliver and store oil and gas -- or in Magellan's case, refined petroleum products like gasoline and diesel -- to end-markets. Unlike others, though, Magellan's management team has arguably done the best job of balancing the need to spend on growth projects, delivering ever-increasing dividend payments to shareholders, and maintaining capital discipline.
Magellan has raised its payout for 62 straight quarters at an annual rate of 12%, and it has achieved that high rate of growth without tapping the capital markets nearly as much as its peers. Since the beginning of this decade, it has maintained a much lower debt to EBITDA (earnings before interest, taxes, depreciation, and amortization), and has kept share issuance to a minimum.
MMP Financial Debt to EBITDA (TTM) data by YCharts.
Pipelines and energy infrastructure is one of those businesses that has the potential to handsomely reward an investor, as long as the management team can properly balance those three needs. Magellan has done it better than any other company in the business for years, and its dividend yield of 5.1% is a much larger check than anything Kinder Morgan can provide today.
An easier trend to follow
Cory Renauer (Omega Healthcare Investors Inc.): Energy markets can be awfully volatile, but we can count on 10,000 baby boomers celebrating their 65th birthdays every day for at least another decade. That should keep the long-term care and skilled-nursing facility operators that rent properties from Omega Healthcare Investors busy enough to pay their bills for the foreseeable future.
Although the long-term demographic trend is moving in the right direction, adjustments to Medicare and Medicaid caught some of the 77 operators that rent from Omega Healthcare in a bind. One operator even went far enough into arrears that Omega was forced to record a big non-cash impairment charge in the third quarter that makes this real estate investment trust (REIT) seem riskier on the surface than it truly is. The good news is that fear of further fallout has driven the shares low enough to offer a massive 9.3% dividend yield at recent prices.
Sooner or later, Medicare and Medicaid will need to adjust billing policies regarding skilled-nursing and long-term care facilities. Given Congress' recent inability to find common ground over healthcare-spending concerns, though, we probably won't need to deal with another major disruption for a few more years, at the very least.
After adjusting for the big non-recurring impairment charge, plus a few odds and ends, Omega Healthcare expects funds from operations to reach at least $3.27 per share for the full year. That should be more than enough to fund the company's dividend, which it recently bumped to an annualized $2.60 per share.
Although this REIT just bumped up its payout, investors probably won't wait long for the next raise. Management has raised the dividend every quarter for five years running.
