Investors have to make a decision every time they buy a stock. There is the balance between risk and reward of the specific investment they want to own. But there is also an opportunity cost, because buying one stock usually means you don’t have to buy another, perhaps similar, stock. Here’s a comparison of it Kinder Morgan(NYSE: KMI) And Chevron(NYSE: CVX) arrives today, with both dividend stocks currently offering yields of around 4%.
Kinder Morgan operates in the mid-market segment of the broader energy sector. This means that it owns vital energy infrastructure, such as pipelines, storage and transportation assets. It focuses on North America, where most of its revenue comes from the fees it charges other companies for the use of its assets. The midstream is probably the most consistent cash flow generator within the energy sector.
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At its core, Kinder Morgan is a toll taker. The demand for oil and gas, and the other products that move through the system, is more important to financial results than the price of oil and gas. Energy demand often remains high even when prices are low because oil and natural gas are so essential to economic activity.
Chevron is a completely different entity. As an integrated energy giant, Chevron is active in the upstream (oil and gas production), midstream (pipelines) and downstream (chemicals and refining). Each of these segments performs slightly differently over the business cycle. As noted, midstream is a fairly stable segment in terms of performance, while upstream and downstream are both quite volatile and commodity-driven. That said, the upstream and downstream often diverge, as oil and natural gas are important inputs to the chemical and refining sectors.
So having broad energy sector exposure tends to smooth out the highs and lows of the volatile energy sector over time. Additionally, Chevron has a history of being fiscally conservative with its balance sheet, allowing it to take on debt during oil downturns so it can continue to finance its operations and support its dividend. All told, Chevron is one of the more conservative ways to gain exposure to the energy sector if you want to own a company that produces oil and natural gas.
The midstream sector is widely known as a good fishing ground for high-yielding stocks. That’s why Kinder Morgan’s dividend yield is currently just over 4%. That compares favorably with the S&P500 index, which yields only 1.2%, and the average energy shares return 3.3%. But some of Kinder Morgan’s closest competitors have yields of 6% or higher.
However, this is where things get interesting. Chevron’s dividend yield is also currently around 4%. Frankly, it’s a completely different company, as noted. However, Chevron has increased its dividend annually for 37 years in a row, despite the increased volatility inherent to its business model. Kinder Morgan cut its dividend in 2016. Notably, Kinder Morgan’s dividend cut came after it told investors to expect a dividend increase of as much as 10%! Kinder Morgan went back on its word again in 2020, when it implemented a 5% dividend increase instead of the 25% it had previously promised.
CVX dividend per share data (quarter) according to YCharts
What happened in 2016 and 2020? The energy sector faced headwinds. So right when investors were likely relying on Kinder Morgan to support its dividend, it didn’t. Despite having significant exposure to volatile energy prices, Chevron didn’t skip a beat on its dividend during those tough times. It’s ultimately the more reliable dividend stock.
Given that Chevron and Kinder Morgan have such similar returns today, it’s difficult to suggest that Kinder Morgan is the better energy investment for income-oriented investors. That’s especially true given the very different paths their dividends have taken. If you’re looking for a high-return energy investment, the risk-reward balance here appears to be in Chevron’s favor. Or if you’re leaning toward Kinder Morgan, at least consider some of its higher-yielding peers, such as Enterprise product partners And Enbridgeboth of which have better track records regarding the income streams they provide to investors.
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Reuben Gregg Brewer has positions in Enbridge. The Motley Fool holds positions in and recommends Chevron, Enbridge and Kinder Morgan. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
Same yield, but no value comparison: Chevron vs. Kinder Morgan was originally published by The Motley Fool
