The severe oil bear market that started in mid-2014 took a huge toll on Kinder Morgan (KMI 0.48%) and Plains All American Pipeline (PAA 0.95%). That was a long time ago, and Wall Street tends to be forward-looking. However, a glance at the past will help differentiate between these two high yielders.

The big player

Kinder Morgan is one of the largest and most diversified midstream companies in North America. It has a scale and reach that few can match, and it is well positioned to grow over the long term. Many industry watchers like the company's prospects. The stock is up a massive 33% or so in 2019.

A man turning valves on an energy pipeline.

Image Source: Getty Images.

However, before jumping on the bandwagon here, it is worth taking a quick look back to 2016. That was the year that Kinder Morgan cut its dividend by a massive 75%. The crux of the problem was that the company was highly leveraged, and raising money via the capital markets at that point wasn't desirable. It was forced to choose between the dividend and its growth plans. Spending money to grow the business won out, which was the right choice for the company. However, investors relying on the dividend were shocked.

"Shocked" might sound like a strong word, but it really isn't. As it turns out, on Oct. 21, 2015, management raised the dividend and stated, "we currently expect to increase our declared dividend for 2016 by 6 to 10 percent over 2015." It noted that it wasn't immune from the oil price decline that was hammering the energy sector, but it was very clear about its ability to keep increasing the dividend. Then, on Dec. 4, 2015, it announced that it had completed its budget process for 2016 and could either afford that dividend increase or use that cash to support its growth plans. And on Dec. 8, management announced the massive dividend cut.

The decision to cut the dividend was the right move for Kinder Morgan, but to change direction like that in less than two months is truly shocking. Trust should be a big issue for any income investor here. That's compounded by the fact that Kinder has reduced its leverage, but its debt-to-EBITDA ratio remains toward the high end of the midstream group. So it continues to operate in a more aggressive way than many of its peers do...which is exactly what led to the dividend cut in the first place. This isn't a story conservative investors should like.

Missed it, twice

Plains All American's story isn't much better. It also let leverage get out of hand, and when times got tough during the 2014 oil downturn, it had to regroup. It stopped raising its distribution each quarter in 2015, letting it sit at $0.70 per unit for four quarters before cutting it by roughly 20% in 2016. That, however, didn't provide enough breathing room, and after another four quarters of a static payment, the distribution was cut again in 2017, this time by 45%. The total cut amounted to nearly 60%.

Weak operating results and heavy leverage were the main drivers of the cuts. There was more going on, including the decision to buy Plains' incentive distribution rights back from its general partner, a move that required issuing a large number of new units. However, the general trend was too much leverage in a difficult market. More important to investors, however, should be the fact that there was a plan to improve results each time. Obviously, neither plan worked out as hoped.

That said, Plains has since taken a very different approach with its balance sheet. Debt to EBITDA has been reduced to the point where it is on par with some of the industry's most conservative names. While management may have gone into each of its earlier turnaround plans with overly optimistic expectations, it looks like Plains has finally come to grips with the idea that debt can be dangerous.

KMI Financial Debt to EBITDA (TTM) Chart

KMI Financial Debt to EBITDA (TTM) data by YCharts.

Plains All American has been turning in solid results lately. And there's plenty of room for dividend hikes, according to some industry watchers. With the vast improvement made on its balance sheet, it might finally be worth a closer look for more aggressive income investors.

A clear winner

Between Kinder Morgan, with a yield of around 5%, and Plains All American, with its 6.2% yield, Plains gets the nod. It appears to have learned well from the past and repositioned its balance sheet to better withstand future headwinds.

That said, neither of these midstream names should be a first choice for most investors, particularly those with a conservative profile. Their distribution history is just too troubling to forget. That's especially true with conservative industry bellwethers like Enterprise Products Partners and Magellan Midstream Partners each yielding around 6%. Both of these midstream players managed to increase dividends regularly while Kinder and Plains were cutting. There are simply better options in the midstream space, so why bother with Kinder Morgan or Plains?