Here’s Another Favorite Lifetime Income Grower…
In a recent article, I wrote about a group of income-payers that are a key area of focus for us over at High-Yield Investing.
In fact, they should have a place in any well-balanced income portfolio.
I call these “Lifetime Income Growers.”
These are the few companies you could buy today and potentially hold for the rest of your life. They may not have the highest yields right away. But they will shower you with bigger and bigger dividends each year…
In that original piece, I told you a little bit about one of my favorite Lifetime Income Growers.
And today, I want to tell you about another favorite. It’s not a master limited partnership like Enterprise Products Partners (NYSE: EPD), but it operates in the same realm.
Another Favorite Lifetime Income Grower
I’m talking about Kinder Morgan (NYSE: KMI), the nation’s largest owner of midstream energy infrastructure.
There used to be four different publicly-traded parts to this $70 billion juggernaut. But in 2014 those various limited and master partnership interests were consolidated into one corporate entity.
Kinder Morgan owns the backbone assets that have enabled the United States to become one of the world’s top energy producers. For starters, its network of natural gas pipelines stretches 70,000 miles and crisscrosses the entire North American continent. It connects all major supply basins including the Marcellus, Utica, and Haynesville shales.
From gathering to processing to long-haul transmission, approximately 40% of the nation’s gas supply passes through Kinder Morgan’s hands. The company also owns 700 billion cubic feet of gas storage capacity. Keep in mind, natural gas now accounts for approximately 40% of the U.S. power grid – to say nothing of its uses in petrochemicals and transportation fuels.
And we’re just getting started.
A Midstream Juggernaut
Kinder Morgan also owns 10,000 miles of crude oil and refined products pipelines. That’s enough to stretch from Alaska to Florida and back again. Every day, these conduits transport nearly 2 million barrels of crude oil and refined products (gasoline, diesel and jet fuel), making Kinder Morgan the nation’s top transporter.
Aside from pipelines, the company also owns nearly 150 storage terminals that dot the nation’s energy map from coast-to-coast. These tanks (many of which are strategically located along the booming Houston Ship Channel) have the capacity to hold 150 million barrels of refined products, along with ethanol, chemicals, and other products.
The next big puzzle piece is 1,500 miles of pipelines that carry 1.5 billion cubic feet of CO2 per day, mostly to the Permian Basin. Producers use this gas to coax more oil from the ground. Finally, there is a $3 billion backlog of low-carbon projects coming online including liquid biofuels and other ventures.
Source: KMI Investor Presentation
Why I Like This Business
As I’ve discussed before, most of these pipeline and storage assets aren’t sensitive to fluctuating commodity prices and simply act as toll roads for the products passing through. Most capacity is on a take-or-pay basis, whereby customers pay fixed rates regardless of whether they use all of their allotted space. That provides an extra layer of insurance during periods when transportation or storage volume might dip for any reason.
Combined, this vital infrastructure is expected to generate $7.7 billion in adjusted EBITDA. About 61% of that will come from take-or-pay contracts. Another 26% is fee-based and determined by volume.
That means just 7% of the company’s cash flows are sensitive to underlying commodity prices, while 93% will flow in regardless of whether oil and gas prices move up, down or sideways.
We’ve seen more than two hundred upstream producers driven out of business by harsh downcycles since 2015. But the impact on Kinder Morgan has been negligible. The diverse customer base is 200+ strong and composed mainly of highly-rated utilities, refineries and large integrated producers.
Numbers To Know
Over the past 25 years, Kinder Morgan has aggressively plowed more than $50 billion into acquisitions and expansion projects. Those heavy investments are now bearing fruit, with many generating healthy double-digit returns on invested capital.
Multiply that by an expanding portfolio of assets, and you see why distributable cash flow (DCF) is expected to hit $4.8 billion this year, or $2.13 per share. For the record, that’s nearly double the annualized dividends of $1.13.
The company produced $1.1 billion of DCF last quarter alone, enough to meet dividends with $400 million to spare. And management is prudently investing another $2 billion this year in pipeline expansions, compressor stations, storage facilities and other projects to keep the bottom line moving ahead.
More importantly, the company is living within its means. While others spend money faster than they can make it, Kinder Morgan has self-funded dividends and capital spending for seven straight years using internally-generated cash flows rather than tapping into external sources of financing.
The balance sheet, once bloated and unwieldy, continues to slim down. In fact, Kinder Morgan has eliminated $11 billion in debt since 2015, deleveraging to just 4 times EBITDA. It also maintains an investment-grade credit standing.
One of the easiest ways to become wealthy in the stock market is finding stocks that pay consistent dividends. Then, all you need to do is have the patience to let them grow your wealth over time.
KMI has distributed nearly $17 billion in dividend payments since 2016 – equivalent to more than 40% of its market capitalization. The recent yield of 6.7% ranks among the top-ten in the S&P 500.
From the ethane that makes plastics to compressed natural gas that fuels city buses to the LNG that heats homes in Japan, the world needs natural gas. And the U.S. produces 100 billion cubic feet per day, 40% of which courses through Kinder Morgan’s veins (for a tidy fee, of course). The company should continue to reward investors for many years to come.
In the meantime, over at High-Yield Investing, my team and I have built a solid portfolio full of market-beating yields that reward investors year after year. With a little patience (and dividend reinvestment), you could be on your way to earning tens of thousands in dividends a year.