Kinder Morgan (KMI -0.48%) is a large player in the North American midstream sector offering a fat 6.2% dividend yield. That's far better than what you'd get if you bought an S&P 500 index exchange-traded fund (ETF), which yields roughly 1.6%, or the 4% a broadly diversified energy ETF like Vanguard Energy Index ETF offers.
But is that enough to make Kinder Morgan a buy?
Business basics
With a $40 billion or so market cap, Kinder Morgan is a big player in the North American energy sector. Energy is inherently a cyclical industry, as prices for oil and natural gas can change dramatically and swiftly. But even when supply and demand get out of balance, which usually leads to price swings, demand itself still remains fairly resilient given how important these carbon fuels are to the world economy. This is notable because Kinder Morgan's business is focused on generating reliable cash flows. Around 60% of its contracts are structured as take or pay, with another 25% containing straight fees.
Image source: Getty Images.
The company can get customers to agree to such terms because the vital energy infrastructure Kinder Morgan owns helps to move oil, natural gas, and the products they get turned into around the world. Without Kinder Morgan's pipelines, storage, processing, and transportation assets, the energy sector would be thrown into a state of disarray. That may sound like hyperbole, but the company claims to have the largest natural gas transportation network in North America and the largest CO2 transportation capacity in the region, and to be the largest independent transporter of refined products and the largest independent terminal operator.
Now add in the hefty 6.2% dividend yield and five years' worth of annual dividend increases and it is understandable that dividend investors would find the stock interesting. That said, from a big-picture perspective, many of the most attractive midstream investment opportunities are in the past, so the dividend is likely to represent the lion's share of an investor's return here. Thus, Kinder Morgan is most appropriate for those seeking to maximize the passive income they are generating in the here and now. But it still isn't a slam-dunk investment.
History is not friendly
The first big negative is the company's dividend cut in 2016, which came just months after management said investors could expect a dividend increase of as much as 10%. The cut was the right decision for Kinder Morgan, which basically had to choose between its capital investment plans or the dividend payment, but it was a huge blow for investors counting on that income. It is understandable that more-conservative dividend investors would have trust issues here.
But there's more to this story because Kinder Morgan isn't the only big player in the midstream space. If you compare the company's stock market performance to similarly large peers like Enterprise Products Partners (EPD 0.35%) and Enbridge (ENB -1.06%), it lags badly over the longer term. In fact, Kinder Morgan's stock price declined roughly 40% from its initial public offering in 2011. Over that same time span, Enterprise increased 22% and Enbridge jumped 37%.
Looking only at the stock price isn't exactly the best way to compare these companies, because they are income stocks and have long offered huge yields. For reference, Enterprise's yield today is around 7.4% and Enbridge's dividend yield is 6.6%. Note that both are higher than what you'd collect from Kinder Morgan. If you include reinvested dividends, which is total return, Kinder Morgan's performance improves to roughly break even since its IPO. That's hardly impressive. Enbridge, meanwhile, has returned 145% and Enterprise 153% over that same span. Clearly, these peers have been doing a better job for shareholders than Kinder Morgan.
KMI Total Return Price data by YCharts
As any investor knows, the past does not predict the future. And Kinder Morgan's 2016 dividend cut plays a large role in its underperformance. But if you are a long-term dividend investor looking to live off of the income you can create from your portfolio, Kinder Morgan doesn't appear to be the best option. Indeed, you'd get more income from Enterprise and Enbridge, and they have clearly placed a higher value on making investor-friendly decisions. For example, Enterprise has increased its distribution annually for 24 years, while Enbridge's dividend has grown each year for 28 years.
Better options
Would buying Kinder Morgan be a huge mistake? Probably not. However, that doesn't make it the best investment option for your dividend portfolio. Given the history and the relative yield compared to peers, investors would likely be better off broadening their investment universe a little to include peers like Enterprise and Enbridge. So far both have been far more rewarding investments, hinting at a much better use of investor capital.
