When Wall Street sinks its teeth into a story, it can lead to strange outcomes. For example, Kinder Morgan (NYSE: KMI) has seen an increase in material prices and now yields a relatively small 4.1%. You can do more than two percentage points better by investing in its midstream energy competitors Partners for business products (NYSE:EPD) or Enbridge (NYSE: ENB).
And that’s just scratching the surface of why these two midstream giants are better choices than Kinder Morgan. Here’s what you need to know.
Kinder Morgan’s unit count is up about 50% in the past year, more than twice as much as Enterprise or Enbridge. While you can debate whether or not that rapid progress was justified, it’s very clear at this point that Kinder Morgan’s 4.1% yield is significantly lower than the 6.4% you’d get if you Enterprise would buy and Enbridge’s 6.2% dividend yield.
If you’re looking for a midstream investment with high returns, Kinder Morgan simply doesn’t fit that well on the income side of the equation. But don’t stop there, as Kinder Morgan has some other negatives to consider when it comes to returning cash to shareholders.
First, in late 2015, it told investors to expect a dividend increase of as much as 10%. And a few months later, the company announced that the dividend would be cut by about 75% instead.
Its next major setback came in 2020, when it told investors to expect a 25% dividend increase. But when push came to shove, the limited partnership only came up with a 5% increase.
The connecting element here is that the energy sector faced headwinds in both periods. So just when shareholders most wanted management to keep its word, they were disappointed.
By comparison, Enterprise Products Partners has increased its distribution every year for 26 consecutive years. Enbridge has increased its dividend every year for 30 consecutive years. That means these two Kinder Morgan competitors passed on the increases in both 2016 and 2020, despite the headwinds in the energy sector.
If consistency in dividends is important to you, this fact alone should be enough to convince you to avoid Kinder Morgan and delve into Enterprise and Enbridge. But there’s more to like about each of them.
Both Enterprise and Enbridge are North American midstream giants, with vital infrastructure assets that are difficult to replace or relocate. They provide integrated services – through the pipeline, storage, transportation and processing assets they own – that the energy sector simply cannot do without. The fees they charge for the use of their assets provide reliable income in both the good and bad energy markets.
Both Enterprise and Enbridge have investment-grade balance sheets and well-covered benefits. This essentially means that these two industry leaders can withstand a lot of headwinds before having to reduce the money they pass on to investors. That fact is borne out by their strong payment history.
Perhaps the most striking difference is that Enterprise focuses entirely on the midstream sector. It would be a fairly direct replacement for Kinder Morgan.
Enbridge’s portfolio is a bit more complex, including natural gas companies and renewable energy assets. That makes it a bit of a broader energy play, but one with a cover of clean energy. If that seems like a good thing, you might choose this over Enterprise.
Just because a stock is rising quickly doesn’t mean it’s worth owning, even though the lemming-like behavior of Wall Street denizens may give the impression that you’re missing out. In some cases, a rapid rise can even make an investment less desirable because it quickly prices in a lot of good news (and reduces returns, in the case of income stocks).
If you’re looking at Kinder Morgan right now, take a step back and consider the value you’re getting as an income investor. You’ll probably find that you’re better off with Enterprise or Enbridge.
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Reuben Gregg Brewer has positions in Enbridge. The Motley Fool holds and recommends positions in Enbridge and Kinder Morgan. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
2 High-Yield Midstream Stocks to Buy By Hand and 1 to Avoid was originally published by The Motley Fool
