Invest in Two High-Performing Midstream Stocks Proactively and One to Steer Clear Of
If you're seeking a profitable investment in the energy sector, a good starting point is midstream stocks. The midstream sector is rich with toll-taking companies that boast steady cash flows, ensuring their dividend payouts. However, not all midstream companies are equal, which is why you might want to steer clear of Kinder Morgan (KMI 1.59%), but might find Enterprise Products Partners (EPD 0.26%) and Enbridge (ENB 0.52%) quite appealing.
Let me inform you.
Kinder Morgan's questionable history
Kinder Morgan is one of the largest energy infrastructure owners in North America, boasting valuable midstream assets like pipelines that would be tough, if not impossible, to replace or substitute. The advantageous aspect is that it underpins a robust business. But, there's a catch. The dividend record isn't exactly captivating.
In late 2015, Kinder Morgan pledged to increase its dividend by up to 10% in 2016. However, by year-end, the dividend was actually slashed by 75%. This decision was beneficial for the company given the energy sector downturn at the time, which forced a choice between growth investment or dividend support. But, dividend supporters who trusted leadership would have been taken aback.
Then, in 2020, the firm declared plans to up the dividend by a massive 25%. This was part of an extended strategy to restore investor trust. However, the coronavirus pandemic led to management retracting this promise, only boosting the dividend by 5%. Yes, it was an increase and not a reduction (a significant improvement!), but it was still leadership retreating on its stated dividend intentions. These trust issues might be justified for cautious investors, which might outweigh the stock's 4.2% dividend yield.
Enterprise and Enbridge have been more consistent income sources
On the other hand, Enterprise Products Partners has boosted its distribution for 26 consecutive years. Enbridge has increased its dividend (in Canadian dollars) for 29 consecutive years. This means that investors enjoyed a rising income stream even during the 2016 energy downturn and the challenging 2020 coronavirus pandemic, which proved particularly taxing for Kinder Morgan.
Like Kinder Morgan, Enterprise and Enbridge are significant North American midstream operators. They gather tolls from energy companies utilizing their extensive pipeline, storage, processing, and transportation facilities to transport energy globally. This results in consistent cash flows to support significant investor payouts. Today, Enterprise's distribution yield stands at 6.8%, while Enbridge's dividend yield is 6.1%.
The primary difference lies in corporate structure. Enterprise is a master limited partnership (MLP), which involves extra tax-time work, notably dealing with a K-1 form. Enbridge is a traditional company, but it hails from Canada and pays dividends in Canadian dollars. The dividends received by U.S. investors will be adjusted to account for currency swings. Nevertheless, these two midstream entities are revered, established peers of Kinder Morgan and have proven to be far more dependable income investments.
Kinder Morgan might not be the best choice if dividends are your priority
If you're considering Kinder Morgan as a reliable income stock, well, you might want to explore further. Its dividend history hardly compares favorably to potential alternatives like Enterprise and Enbridge. And, at present, you can get a more appealing yield from these more dependable income stocks. That's likely to be a win/win situation for cautious income investors.
Kinder Morgan's volatile dividend history might make it less appealing to investors focused on dividends. Despite its high 4.2% dividend yield, the company has a history of missed dividend increases and retreating from stated dividend intentions. On the contrary, both Enterprise Products Partners and Enbridge have demonstrated more consistency with their dividends, increasing them for multiple consecutive years, even during challenging market conditions.
