Kinder Morgan (KMI) is a North American energy infrastructure company that specializes in owning and operating pipelines and terminals that move oil and gas. Since Kinder Morgan operates, or owns an interest in, approximately 82,000 miles of pipelines and 143 terminals, this is one of the largest infrastructure companies in all of North America.

No matter what happens to the price of underlying commodities, Kinder Morgan gets paid. It’s effectively a “toll booth” for energy commodities. Now, it won’t knock your socks off with growth. But the yield is outstanding.

Kinder Morgan’s stock is yielding 6.3%. Wow. That’s some serious income, even in a world in which rates have risen.

Now, again, getting back to my prior point, you do have to sacrifice growth in order to access that yield. No free lunch. You can never have it all. 

Kinder Morgan has increased its dividend for five consecutive years, which is a track record that’s shorter than it ought to be because of a 2016 dividend cut that came on the heels of a mismanaged balance sheet. The three-year DGR is 5.1%, and I think it’s reasonable to expect low-single-digit dividend growth per year. Based on forward guidance for DCF/share, the payout ratio is 52.1%. That’s healthy.

There is nothing demanding about the valuation here. The best way to value a pipeline business like this is to look at the multiple of cash flow. Kinder Morgan is guiding for $2.13 in DCF/share for this fiscal year, putting the forward multiple at 8.3. To be fair, that’s actually pretty close to its own five-year average, which is near 8.

However, this stock has been in the penalty box for years, and justifiably so. But we invest in where a business is going, not where it’s been. By just about every standard, this is a very low and undemanding multiple of cash flow. For income-oriented dividend growth investors, a well-covered 6.3% yield on a cheap name with recurring revenue is awfully interesting.

— Jason Fieber

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