Investors have to make trade-offs every time they buy a stock. There’s the balance between risk and reward from the specific investment they choose to own. But there’s also an opportunity cost, because buying one stock usually means not buying another, perhaps similar, stock. This is where a comparison of Kinder Morgan(NYSE: KMI) and Chevron(NYSE: CVX) comes in today, with both of these dividend stocks offering yields of roughly 4% right now.
Kinder Morgan operates in the midstream segment of the broader energy industry. That means that it owns vital energy infrastructure like pipelines, storage, and transportation assets. It is focused on North America, where the majority of its income comes from the fees that it charges to 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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Essentially, Kinder Morgan is a toll taker. Demand for oil and gas, and the other products transported through its system, is more important to its financial results than the price of oil and gas. Demand for energy tends to remain high even when prices are low because oil and natural gas are so vital to economic activity.
Chevron is a vastly different entity. As an integrated energy giant, Chevron operates in the upstream (oil and gas production), the midstream (pipelines), and the downstream (chemicals and refining). Each of these segments performs a little differently through the business cycle. As noted, the midstream is a fairly stable segment, performance wise, while the upstream and downstream are both pretty volatile and commodity driven. That said, the upstream and downstream often diverge, since oil and natural gas are key inputs into the chemical and refining businesses.
Thus, having broad exposure across the energy sector tends to soften the highs and lows of the volatile energy sector over time. On top of that, 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 fund its business and support its dividend. All in, 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 generally known as a good fishing pool for high-yield stocks. To that end, Kinder Morgan’s dividend yield is a touch over 4% right now. That compares favorably to the S&P 500 index, which is only yielding 1.2%, and the average energy stock’s 3.3% yield. But some of Kinder Morgan’s closest peers have yields that are 6% or higher.
This, however, is where things get interesting. Chevron’s dividend yield is currently around 4%, too. To be fair, it is a very different company, as noted. However, Chevron has increased its dividend annually for 37 consecutive years despite the increased volatility inherent in its business model. Kinder Morgan cut its dividend in 2016. Notably, Kinder Morgan’s dividend cut came after it had told investors that they should expect a dividend increase of as much as 10%! Kinder Morgan went back on its word again in 2020, when it pushed through a dividend increase of 5% instead of the 25% it had earlier promised.
What was happening in 2016 and 2020? The energy sector was facing headwinds. So, right when investors were probably relying on Kinder Morgan to support its dividend, it didn’t. Chevron, despite having material exposure to volatile energy prices, didn’t skip a beat on its dividend during those difficult periods. It is, in the end, the more reliable dividend stock.
Given that Chevron and Kinder Morgan have such similar yields today, it is hard to suggest that Kinder Morgan is the better energy investment for income-focused investors. That’s particularly true given the very different paths their dividends have taken. If you are looking for a high-yield energy investment, the risk/reward balance here seems to favor Chevron. Or if you are leaning toward Kinder Morgan, at the very least consider some of its higher-yielding peers, like Enterprise Product Partners and Enbridge, which both have better histories with regard to the income streams they offer investors.
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Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Chevron, Enbridge, and Kinder Morgan. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
