Investors looking to create a seven-figure portfolio should probably own a diversified list of stocks. While capital growth should be a key focus, there's also a place for high-yield investments in the mix. But should 6.8%-yielding Kinder Morgan (KMI -0.64%) be on your buy list? There's a good reason to believe that this midstream giant won't be a millionaire maker anytime soon. And the dividend history here suggests that those considering buying it might be better off elsewhere.
What does Kinder Morgan do?
Simplifying things somewhat, Kinder Morgan owns the energy infrastructure that is used to move, store, and process oil and natural gas. These are vital assets and its portfolio would be difficult, if not impossible, to replace. But there's an interesting twist to the midstream business model. It is largely fee-based, with Kinder Morgan collecting tolls for the use of its assets. Thus, the price of the commodities that flow through its system are less important than the demand for those products.
Image source: Getty Images.
That's a recipe for a fairly reliable business, not one that is characterized by rapid growth. In fact, the best locations for midstream assets, which are large and expensive to build, have mostly been developed at this point. Thus, Kinder Morgan passes material amounts of cash on to investors in the form of dividends. If you are looking for income stocks, that is potentially good news. The hefty 6.8% dividend yield is multiples of the roughly 1.4% you would get from an investment in an S&P 500 index fund.
There is a place for high-yield stocks in every portfolio, even ones that are focused on capital appreciation. But Kinder Morgan isn't going to create a million-dollar portfolio all on its own anytime soon. That high yield is going to represent most of the return. Slow business growth is likely to be the norm, largely driven by modest capital investments, regular (but small) fee increases, and occasional acquisitions.
There's another issue to consider with Kinder Morgan
So, given the basic nature of Kinder Morgan's business, investors looking to build a million-dollar nest egg might want to look elsewhere. But there's another fact here to consider, and that's trust. If you are trying to build up to seven figures, you need to take a long-term perspective, and that could require owning a stock for a very long time. You need to believe that the management team will live up to its promises. Kinder Morgan has fallen short of that yardstick.
In late 2015, Kinder Morgan told investors that the dividend could increase by as much as 10% in 2016. But just a couple of months after making that statement, it ended up reducing the dividend by a painful 75%. That cut was the right decision for the company, but it was a real blow for income investors who trusted management would live up to its promises.
While the dividend has gotten back into growth mode, it is still below the pre-cut level. And, unfortunately, Kinder Morgan fell short of its promises again in 2020. It had told investors to expect a dividend increase of 25%, but only came through with a 5% boost. That's much better than a dividend cut, for sure, but management still didn't live up to its own commitment.
Most investors should look elsewhere
If you are looking for a stock that can offer you capital growth, Kinder Morgan probably won't be a great fit. If you are looking for a dividend stock, the company's dividend history should leave you with real concerns around trust. Either way, Kinder Morgan doesn't look like it would be a great fit for most investors as they try to build a million-dollar nest egg.
