If you’re watching Kindermorgan (KMI) 0.26%)) Dividend yield of 4.1% should also be considered Enterprise Product Partners (EPD) -0.06%)) and its distributed yield of 6.8%. But the reason you prefer Enterprise over Kindermorgan is only partially related to yield, especially if you are a dividend-focused investor. Here’s what you need to know to determine these two middle-class giants:
What do Kinder Morgan and Enterprise do?
Although large, both Kindermorgan and Enterprise product partners operate in the energy sector. The sector is known for being volatile thanks to the significant impact that oil and natural gas prices have on the financial results of most energy companies. Kinder Morgan and Enterprise are largely paid recipients and are not all energy companies as they charge fees to transport oil and natural gas from around the world.
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Essentially, these midstream players are between upstream (energy production) and downstream (chemicals and purification). The pipelines, storage and transport assets you own create reliable fees, and the price of the goods is far less important than the demand for services offered by the price passing through the system. And energy demand tends to be fairly high, even when energy prices are low. Therefore, both Kinder Morgan and Enterprise have attractive and reliable business models in otherwise unstable industries.
From this perspective, Kinder Morgan and Enterprise are very similar. They are also very similar in terms of the size of the largest asset portfolio in North America. In fact, both companies have market capitalizations ranging from $60 billion to $70 billion. But they are not compatible.
Why most investors are likely to like companies
Midstream investments are generally considered for the reliable income streams they provide to investors. The lofty dividend yields for both Kinder Morgan and Enterprise are part of that story. However, there is a backhistory that investors should not ignore.
In 2016, the energy sector was going through difficult times. Enterprises increased its distribution. Kinder Morgan reduced its distribution by 75%. To be fair, it was the right move for the company, but it was a terrible outcome for income investors. But the real problem is that several months before the cuts, management had led to a dividend increase of 10%.
Cash freed from dividend cuts was used to strengthen Kindermorgan’s balance sheet and invest in growth opportunities. So the cut ultimately brought management back to good balance in dividend growth. But there was a problem here too. It sets an aggressive dividend growth schedule and failed to reach its plans in a challenging energy market during the 2020 coronavirus pandemic. In other words, Kinder Morgan has beaten dividend investors during each of the latest energy industry recessions. Enterprises has increased distribution modestly in 2020, but that’s basically what they’ve done over the years.
False on the side of attention is the best choice for most investors
In fact, at this point, Enterprise has steadily increased its distribution for the 26th consecutive year. Kinder Morgan appears to be far better in today’s financial and business shape than 2016. And considering the uncertainty at the time, the dividend errors in 2020 were also reasonable. However, if you can trust how your investment management team handles what is important to you, Enterprise is a better investment option. And while you’re in it, you collect higher yields.
Reuben Gregg Brewer has no position in any of the stocks mentioned. Motley’s fool has a job at Kinder Morgan. Motley Fool recommends enterprise product partners. Motley Fools have a disclosure policy.
