If you are looking for a high-yield investment in the energy sector, a great place to start is with midstream stocks. The midstream is filled with toll-taker companies that have reliable cash flows supporting their dividends. However, all midstream companies are not created equal, which is why you might want to avoid Kinder Morgan (NYSE: KMI) but will probably find Enterprise Products Partners (NYSE: EPD) and Enbridge (NYSE: ENB) very attractive.
Here’s what you need to know.
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Kinder Morgan is one of the largest owners of energy infrastructure in North America. It has valuable midstream assets, like pipelines, that would be difficult, if not impossible, to displace or replace. That’s the good news and, frankly, underpins a pretty strong business. There’s just one problem. The dividend history isn’t very compelling.
In late 2015 Kinder Morgan told investors that it was going to increase its dividend by as much as 10% in 2016. By the end of 2015, however, it had announced that the dividend would in fact be cut 75%. The decision was the right one for the company given that the energy industry downturn at the time left Kinder Morgan to choose between investing for growth or supporting the dividend. But dividend investors who trusted management would have been shocked.
Then, in 2020, the company announced plans to increase the dividend by a huge 25%. That was part of a multiyear effort to regain investor trust. But the coronavirus pandemic led management to pull back on that promise and only increase the dividend by 5%. Sure, that was an increase and not a cut (a big improvement!), but it was still management going back on its stated plans concerning the dividend. It is reasonable for conservative investors to have trust issues here that would outweigh the stock’s 4.2% dividend yield.
By comparison, Enterprise Products Partners has increased its distribution for 26 consecutive years. Enbridge has increased its dividend (in Canadian dollars) for 29 consecutive years. Note that this means investors were rewarded with a growing income stream right through the 2016 energy downturn and through the 2020 coronavirus pandemic that proved so difficult for Kinder Morgan to navigate.
Like Kinder Morgan, Enterprise and Enbridge are giant North American midstream operators. They collect tolls from energy companies that use their vast pipeline, storage, processing, and transportation systems to move energy around the world. This produces reliable cash flows to support large shareholder payouts. Enterprise’s distribution yield is 6.8% today, while Enbridge’s dividend yield is 6.1%.
