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Could Kinder Morgan Be a Millionaire-Maker Stock?

By Reuben Gregg Brewer – Sep 30, 2021 at 10:16AM

Key Points

  • Kinder Morgan made a tough dividend choice in 2016, but has turned things around since then.
  • While ESG-focused investors might not find it of interest, it is positioning itself well for the future.
  • Add in a fat dividend yield, and for the right investor Kinder Morgan could be an interesting portfolio addition.

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This midstream giant is heavily invested in carbon-based energy, but there's still material opportunity ahead.

Kinder Morgan (KMI) is one of the largest midstream companies in North America. It has a huge 6.5% yield, five times what you can get from an S&P 500 Index fund. For dividend investors looking to build a seven-figure nest egg, it's worth considering. Here's a look at whether or not Kinder Morgan can be a millionaire-maker stock for you.

The reason to say no

There are two types of investors that should likely stay away from Kinder Morgan. The first is the most obvious, the second is more subtle.

As noted, Kinder Morgan is a midstream giant. That means it owns the infrastructure that helps move oil and natural gas around the world. While its assets would be hard, if not impossible, to replicate, anyone who prefers to avoid carbon-tied investments will want to avoid Kinder Morgan, no matter how attractive an investment it might or might not be.

An energy pipeline with a person welding.

Image source: Getty Images.

The second type of investor who might want to think twice here is anyone with a conservative income-oriented investment style. This is because Kinder Morgan told investors in late 2015 that they should expect a dividend hike of as much as 10% in 2016 -- but before the year was out, that turned into a 75% dividend cut. It was without a doubt the right choice for the company, which was dealing with a difficult market and needed to choose between capital investment and the dividend (capital investment obviously won). But dividend investors were blindsided. And while the midstream giant has gotten back on the dividend growth path, it promised a big 25% dividend hike in 2020, but then pulled it back to 5% because of coronavirus pandemic headwinds. Again, this was the right call for the company -- but for anyone who remembers the 2016 dividend event, it might have felt a little too similar for comfort. 

The reason to buy 

That said, looking at the second dividend decision is actually pretty interesting. The company basically decided that it needed to increase the dividend at a rate that protected its dividend-paying ability. In other words, it wanted to avoid a situation in which it might have to cut the payment again. So it chose to go slower than it had previously stated so it could live up to its original promise, just over a longer period of time. And, notably, it increased the dividend during a global pandemic, and again in 2021. So this is a different situation than what happened in 2016.

Moreover, the second-quarter dividend was covered by more than 1.6 times. There's plenty of room for more dividend hikes and some adversity in that coverage ratio.

That well supported 6.5% yield, meanwhile, gets you 65% of the way to a 10% annual return. That's a big head start that you won't get from the tiny yield on offer from the S&P 500 Index or other "hot" sectors, like technology.

As for Kinder Morgan's future in the energy sector -- well, clean energy is the ascendant technology, but energy transitions aren't as easy as flipping a light switch. Realistic projections of the future all include oil and natural gas as vital sources of energy for decades to come. So Kinder Morgan's toll-taker model, in which it gets paid for the use of its assets, looks like it has a long road ahead of it. And since the price of the products going through its system are less important than demand, it could be a more steady way to play a contrarian position in the energy sector.

KMI Dividend Yield Chart

KMI Dividend Yield data by YCharts

Meanwhile, Kinder Morgan has a $1.3 billion backlog of growth projects to work on. Although that's not huge, historically speaking, it means that the company is far from a fading violet. And it has to be paired with the fact that Kinder Morgan is big enough to be an industry consolidator. Notably, it just closed on two deals worth roughly $1.5 billion. Such acquisitions are likely to be an important source of growth going forward.

All in all, for more aggressive types, Kinder Morgan could be a solid piece of a seven-figure portfolio.

One more positive

There's still another takeaway that's important: Kinder Morgan is well aware of the clean energy zeitgeist, and is working to change along with society. For example, it is heavily focused on natural gas, a fuel that is expected to help the world transition to cleaner options. And management recently started a new division focused on the energy transition, which was bolstered by one of the two above-noted acquisitions. So this midstream giant is not only looking to be an important energy company today, but it is trying to position itself to be one for many years to come. This probably isn't a great option for conservative investors or those with an ESG focus, but for the right type of person it could be a very good fit.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.

Stocks Mentioned

Kinder Morgan Stock Quote
Kinder Morgan
KMI

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