Should one Buy, Sell, or Maintain Positions in Kinder Morgan?
Looking at midstream giant Kinder Morgan (KMI 1.10%) at first glance, it appears to be an enticing dividend stock. Offering a yield of around 4%, it surpasses the average energy company's 3.3% yield, based on the Energy Select Sector SPDR ETF. Moreover, Kinder Morgan has reported yearly dividend increases since 2018.
However, before jumping the gun to invest in Kinder Morgan, delve deeper into the midstream sector. Here's why:
Should you Buy or Hold Kinder Morgan?
Kinder Morgan operates within the midstream sector, primarily by owning critical energy infrastructure like pipelines, storage, and transportation assets. While this sector is typically less vulnerable to the price swings of oil and natural gas, Kinder Morgan's above-average 4% yield is well-supported by the company's distributable cash flow, which covers the dividend by a robust 1.7 ratio in the third quarter of 2022.
Given its solid distribution coverage ratio, the risk of a dividend cut is minimal, and growth is more likely over time. A higher yield can indeed be captivating, especially considering Kinder Morgan's status as one of North America's largest midstream operators. That being said, hold your horses before making your move. There's more to this story.
Consider Selling Kinder Morgan
Kinder Morgan's share price has soared over the past year by more than 60%, marking a significant increase for an often stagnant niche in the energy sector. Comparatively, Kinder Morgan's peers, like Enbridge (ENB 0.59%) and Enterprise Products Partners (EPD -0.33%), have seen only moderated advances, with leaner dividend yields.
The enhanced value of Kinder Morgan's dividend stock may have already accounted for some good news, leaving room for minimal future growth in its 4% yield. Entry into Enterprise and Enbridge could potentially materialize as better income options, as their yields approach 6% each.
Furthermore, both Enterprise Products Partners and Enbridge boast impressive track records, having increased their distributions annually for 26 and 29 years, respectively. Kinder Morgan's yield growth and dividend cut history in 2016 may lead some investors to harbor trust issues.
Exploring Alternatives in the Midstream Sector
While Kinder Morgan is not a bad company, the rapid increase in its share price has made it relatively expensive compared to its larger peers in the midstream sector. Income-focused investors may find better options with Enbridge and Enterprise Products Partners, both strong contenders within the niche.
Enrichment Data:
For instance, Enbridge (ENB) boasts a yield of 6.2%, maintained by a safe dividend safety score and a 72-year uninterrupted dividend streak. With a majority of its revenue sourced from long-term contracts and a strong focus on regulated income, Enbridge can safeguard its cash flow from commodity price volatility.
Enterprise Products Partners (EPD) is equally attractive, based on its 26-year uninterrupted dividend streak, 6.5% yield, and safe dividend safety score. Just like Enbridge, Enterprise Products Partners generates revenue through long-term contracts, ensuring a stable cash flow regardless of commodity fluctuations.
Both Enbridge and Enterprise Products Partners employ self-funded business models, diluting the need for equity issuances to fund growth. Their diversified customer bases also help to stabilize their earnings via exposure to various commodities.
After considering Kinder Morgan's robust dividend coverage ratio of 1.7, you might find its risk of a dividend cut minimal, making growth more likely. However, the significant increase in Kinder Morgan's share price over the past year might have already accounted for some of its future growth, making its 4% yield less appealing compared to other midstream operators with higher yields.
For income-focused investors, alternatives like Enbridge and Enterprise Products Partners might offer better income options. With yields approaching 6% each and impressive track records of distributing increases annually for 26 and 29 years, respectively, these companies could be strong contenders in the midstream sector.
