Pipelines vs. Renewable Energy: Which Is Better for Dividend Investors?

Debating the buy thesis of two high-yielding energy infrastructure stocks.

The energy market is in transition. The global economy is slowly weaning itself off fossil fuels and switching to cleaner power sources. That shift will take some time. Many expect a slow and steady transition, fueled in part by natural gas.

With that in mind, two of our energy contributors staged a friendly debate over whether gas pipeline kingpin Kinder Morgan (NYSE:KMI) is a better buy these days versus clean energy upstart NextEra Energy Partners (NYSE:NEP). Here’s what they had to say. 

Resilient earnings

Daniel Foelber (Pipelines-Kinder Morgan): Kinder Morgan isn’t the flashiest company. Nor is it trying to be. As one of the largest natural gas pipeline companies in North America, Kinder Morgan is focused on generating stable and reliable distributable cash flow (DCF) which it then uses to fund its dividend. Dividends give Kinder Morgan’s investors a steady stream of income without having to sell its stock. Therefore, investors should view Kinder Morgan primarily as a good way of generating investment income, rather than as a means of beating the market.

To achieve predictable DCF, Kinder Morgan writes long-term contracts with its customers, which helps reduce uncertainty. Kinder Morgan showed the effectiveness of this business model in 2020. So far this year, Kinder Morgan has taken only minor hits to its revenue and earnings and has raised its dividend by 5%. Compare that to droves of bankruptcies and dividend cuts throughout the energy sector.

Since 2015, Kinder Morgan has made it clear that it’s only interested in purposeful growth that will generate positive cash flow to support the dividend. The result has been an impressive increase in DCF and decreased spending.

finviz dynamic chart for  KMI

Purposeful investments

As secure as Kinder Morgan’s long-term contracts are, they will end. The main bearish argument is that demand for natural gas will decrease over the long term, which could mean less favorable contracts going forward. Kinder Morgan expects renewables to grow and take market share away from coal and oil, but not so much natural gas. In fact, it expects U.S. natural gas demand to grow, driven mainly by liquefied natural gas (LNG) exports, increased use of natural gas in industrial processes, and exports to Mexico. Other agencies like the U.S. Energy Information Administration (EIA) support Kinder Morgan’s optimism. After a rough 2020, the EIA predicts U.S. LNG exports will rise 30% in 2021. If its planned and proposed projects are completed on schedule, the U.S. could become the largest LNG exporting nation as early as 2024.

Kinder Morgan’s investments demonstrate its confidence in a growing U.S. LNG export market. Its Permian Highway Pipeline project is expected to go into service in early 2021, transporting natural gas from West Texas to LNG export terminals along the Gulf Coast. Many of the world’s largest economies (like China, Japan, and South Korea) are energy-dependent and need natural gas. Lacking international pipelines, these countries take advantage of their expansive coastlines by importing LNG, processing it through regasification terminals, and then transporting it through a network of national pipelines.

Kinder Morgan may not be a fast grower, but its investments are purposeful and support its long-term strategy of generating DCF to support its dividend. With a dividend yield of 7.1%, Kinder Morgan is arguably one of the safest and most attractive energy dividend stocks on the market today.

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