Dividends provide evidence of financial strength. Since dividends are paid in real cash, a dividend payment shows that the corporation has proved that it has earned enough cash to pay its loyal stockholders. Companies that use complex accounting rules in order to create net income out of thin air typically cannot afford to pay dividends. As a result it is no surprise that only the companies with the best prospects can afford to regularly raise distributions.
Below I have highlighted fourteen income stocks, which have raised distributions like clockwork for over five consecutive years:
Intel Corporation (INTC) designs, manufactures, and sells integrated circuits for computing and communications industries worldwide. The company announced that its board of directors has declared an 18.12 cents per share quarterly dividend, reflecting the previously announced 15 percent increase from the fourth quarter of 2010. In addition to that the company’s board of directors authorized an additional $10 billion dollars for share repurchases. Intel has raised dividends for eight years in a row. Yield: 3.40% (analysis)
Williams Partners L.P. (WPZ), a diversified master limited partnership, focuses on transporting; gathering, treating, and processing; storing natural gas; and natural gas liquid fractionating and oil transporting activities. The company operates in two segments, Gas Pipeline, and Midstream Gas and Liquids. This master limited partnership raised its quarterly distribution to 70.25 cents/unit. This is the seventh consecutive annual distribution increase for Williams Partners L.P. Yield: 6%
Commerce Bancshares, Inc. (CBSH) operates as the bank holding company for Commerce Bank, N.A. that provides various general banking services to individuals and businesses. It operates in three segments: Consumer, Commercial, and Wealth. The company raised its quarterly dividend by 2.20% to 23 cents/share. This marked the forty-third consecutive annual dividend increase for this dividend champion. Yield: 2.20% (analysis)
Sunoco Logistics Partners L.P. (SXL) engages in the transport, terminalling, and storage of refined products and crude oil, as well as the purchase and sale of crude oil in the United States. This master limited partnership raised its quarterly distribution to $1.18/unit. This is the ninth consecutive annual distribution increase for Sunoco Logistics Partners L.P. Yield: 5.50%
Magellan Midstream Partners, L.P. (MMP), together with its subsidiaries, engages in the transportation, storage, and distribution of refined petroleum products in the United States. This master limited partnership raised its quarterly distribution to 75.75 cents /unit. This is the tenth consecutive annual distribution increase for this dividend achiever . Yield: 5.50%
Teekay LNG Partners L.P. (TGP) provides marine transportation services for liquefied natural gas, liquefied petroleum gas, and crude oil worldwide. This master limited partnership raised its quarterly distribution to 63 cents /unit. This is the seventh consecutive annual distribution increase for Teekay LNG Partners L.P.. Yield: 6.40%
DPL Inc., engages in the generation, transmission, and distribution of electricity to residential, commercial, industrial, and governmental customers in west central Ohio. The company raised its quarterly dividend by 10% to 33.25 cents/share. This marked the seventh consecutive annual dividend increase for this dividend stock. Yield: 5.00%
The J. M. Smucker Company (SJM) engages in the manufacture and marketing of branded food products in the United States and internationally. The company raised its quarterly dividend by 10% to 44 cents/share. This marked the eleventh consecutive annual dividend increase for this dividend achiever. Yield: 2.90%
Norfolk Southern Corporation (NSC), through its subsidiaries, engages in the rail transportation of raw materials, intermediate products, and finished goods. This railroad announced its plans to raise quarterly dividends by 11% to 40 cents/share. This marked the tenth consecutive annual dividend increase for this future dividend achiever. Yield: 2.60%
Praxair, Inc. (PX) engages in the production and distribution of industrial gases primarily in North America, South America, Europe, and Asia. The company raised its quarterly dividends by 11% to 50 cents/share. This marked the eighteenth consecutive annual dividend increase for this dividend achiever. Yield: 2.20%
Rollins, Inc. (ROL), through its subsidiaries, provides pest and termite control services in North America. The company raised its quarterly dividends by 16.70% to 7 cents/share. This marked the ninth consecutive annual dividend increase for this future dividend achiever. Yield: 1.50%
National Instruments Corporation (NATI) manufactures and supplies measurement and automation products. The company raised its quarterly dividends by 15.40% to 15 cents/share. This marked the ninth consecutive annual dividend increase for this future dividend achiever. Yield: 1.40%
Parker Hannifin Corporation (PH) manufactures fluid power systems, electromechanical controls, and related components. The company raised its quarterly dividend by 10% to 32 cents/share. This marked the fifty-fifth consecutive annual dividend increase for this dividend champion. Yield: 1.50%
Energen Corporation (EGN), an energy holding company, engages in the acquisition, exploration, development, and production of oil, natural gas, and natural gas liquids in the continental United States. The company raised its quarterly dividend by 3.20% to 13.50 cents/share. This marked the twenty ninth consecutive annual dividend increase for this dividend champion. Yield: 1.00%
Investors looking to create a dividend portfolio typically should apply a set of factors to screen out unfavorable candidates. The screen should include criteria such as dividend sustainability, potential for dividend growth out of earnings as well as the number of years investors can afford to wait, until the dividend income is sufficient to cover their needs. Last, but not least, investors should also avoid overpaying for stocks, since this could negatively detract from their long term financial performance.
Full Disclosure: None
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Monday, January 31, 2011
Friday, January 28, 2011
Procter & Gamble (PG): the greatest dividend stock
The Procter & Gamble Company provides consumer packaged goods in the United States and internationally. The company operates in three global business units (GBUs): Beauty and Grooming, Health and Well-Being, and Household Care. The company is a dividend aristocrat which has increased distributions for 54 years in a row. One of the company’s largest investors is no other than Warren Buffett’s Berkshire Hathaway.
Over the past decade this dividend stock has delivered an annualized total return of 7.50% to its shareholders.
The company has managed to deliver an average increase in EPS of 14.50% per year since 2000. Analysts expect Procter & Gamble to earn $3.98 per share in 2011 and $4.37 per share in 2012. This would be a nice increase from the $3.53/share the company earned in 2010.
Procter & Gamble is an example of the perfect dividend growth stock. It has strong brand recognition, solid competitive advantages as well as a diverse portfolio of products sold throughout the world. The company strives to generate cost savings, tries to grow through innovation and through acquisitions, while carefully managing the cash flow in order to pay dividends and buy back stock consistently. The company has the benefit of its large scale and sells a diverse number of products that have a broad geographic reach. The company has a consistent revenue stream and is targeting earnings per share growth in the high single to low double digits.
The company’s return on equity decreased sharply after the acquisition of Gillette in 2005. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
The annual dividend payment in US dollars has increased by 10% per year since 2000. A 10% growth in distributions translates into the dividend payment doubling every seven years. If we look at historical data, going as far back as 1975, we see that Procter & Gamble has indeed managed to double its dividend every seven years on average.
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Over the past decade this dividend stock has delivered an annualized total return of 7.50% to its shareholders.
The company has managed to deliver an average increase in EPS of 14.50% per year since 2000. Analysts expect Procter & Gamble to earn $3.98 per share in 2011 and $4.37 per share in 2012. This would be a nice increase from the $3.53/share the company earned in 2010.
Procter & Gamble is an example of the perfect dividend growth stock. It has strong brand recognition, solid competitive advantages as well as a diverse portfolio of products sold throughout the world. The company strives to generate cost savings, tries to grow through innovation and through acquisitions, while carefully managing the cash flow in order to pay dividends and buy back stock consistently. The company has the benefit of its large scale and sells a diverse number of products that have a broad geographic reach. The company has a consistent revenue stream and is targeting earnings per share growth in the high single to low double digits.
The company’s return on equity decreased sharply after the acquisition of Gillette in 2005. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
The annual dividend payment in US dollars has increased by 10% per year since 2000. A 10% growth in distributions translates into the dividend payment doubling every seven years. If we look at historical data, going as far back as 1975, we see that Procter & Gamble has indeed managed to double its dividend every seven years on average.
After decreasing steadily throughout the decade, the dividend payout ratio increased above 50%, mainly on low EPS growth during the 2007- 2009 recession. Based off forward FY 2010 EPS however, the dividend is adequately covered from earnings. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently, Procter & Gamble is attractively valued at 16 times earnings, yields 2.90% and has a sustainable dividend payout. I would continue monitoring the stock and will consider adding to a position in the stock on dips.
Full Disclosure: Long PG
Currently, Procter & Gamble is attractively valued at 16 times earnings, yields 2.90% and has a sustainable dividend payout. I would continue monitoring the stock and will consider adding to a position in the stock on dips.
Full Disclosure: Long PG
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Wednesday, January 26, 2011
The Future for Dividend Investors
Dividend stocks have managed to outperform non-dividend stocks since 1972. In addition to that, elite dividend indexes such as the Dividend Aristocrats and Dividend Achievers have also managed to outperform the market for almost two decades. Many companies have managed to grow earnings sufficiently enough in order to be able to create a long record of consecutive annual dividend raises. Some investors however are worried, that the last two decades worth of dividend investing data is an aberration, and as a result should not be included in one’s investment decisions.
Another issue with dividend investing is that nothing is set in stone and permanent. The companies with the longest streaks of consecutive dividend increases of the 1990’s have either been acquired, stopped raising dividends or even worse – eliminated them. This is a particular warning sign for many investors, which prevents them from investing in some of the best dividend stocks such as Johnson & Johnson (JNJ), Coca Cola (KO) or Procter & Gamble (PG).
The truth is that nobody knows which companies would perform well over the next few decades. What investors could do is try to identify businesses that make sense in most economic environments, that have wide moats, low earnings volatility, a balance between distributing and reinvesting earnings and which are also trading at attractive valuations. Being diversified doesn’t really detract from performance, and could smooth out volatility in one’s portfolio income stream. Choosing companies which have a history of at least a decade of dividend increases won’t hurt either – companies which generate excess cash flows after reinvesting to sustain and expand the business and share the money with shareholders in the form of dividends are rare but valuable species in today’s market. Things will change over time, and as a result investors would likely have some turnover in their portfolios. While Johnson & Johnson (JNJ) might stop raising dividends a few years from now, it might still be at least a hold for long-term investors.
My main sell rule is to sell when the dividend is cut. If Johnson & Johnson (JNJ) cuts distributions, I would sell and purchase a position in a company which possesses the characteristics that Johnson & Johnson has today. Being flexible and researching companies which could grow earnings and dividends for potential acquisition is a must for dividend investors.
While the economies of the US, Europe and Japan have not been growing by much over the past decade, emerging markets could spur growth for earnings of international companies such as Johnson & Johnson (JNJ), Procter & Gamble (PG) or Coca Cola (KO). This could drive future dividend increases as well, since the emergence of middle class on a global scale would boost consumption for such consumer products. By being flexible and keeping up with the fundamentals behind dividend stocks, one could also be ahead of the game and not be surprised if a dividend is indeed cut. For example, even during the worst financial crisis since the Great Depression, despite having one dividend cut in 2008 and two in 2009, my dividend income stream still managed to increase. The reason was that I hold almost 40 individual dividend stocks, I do not concentrate too much on a given sector and I pick stocks that raise dividends, which I reinvest selectively. In an equally weighted stock portfolio consisting of 40 stocks where one component eliminates dividends, my dividend income would increase if on average dividends increase by more than 2.40% for the year.
Being flexible and keeping up with what is going on in your portfolio is not a prerequisite however. Even if one just holds on to their diversified portfolio of stocks without doing anything over time, through good times or bad, they would likely do just as well as the market over time. The list of the original S&P 500 companies from 1957 for example has managed to not only match, but outperform the market benchmark over the next half a century.
Full disclosure: Long JNJ, KO and PG
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Monday, January 24, 2011
Eleven Dividend Machines Delivering Higher Distributions to Shareholders
Stock prices represent the amount you pay today for the future stream of dividends and proceeds from share sales. In fact, investors can realize a return on their investment either by selling or by collecting a dividend. Investors who rely exclusively on capital gains might have their patience tested during bear markets which is just one example of a situation where the market price might not reflect the true value of a stock. Dividends on the other hand provide a direct link between a company’s fortunes and shareholder returns, which are not dependent on Wall Street. In fact, dividends unlock value in stocks since they are paid out of earnings and it is only companies who can afford to pay dividends that typically make regular distributions. In addition to that, dividends provide a rate of return that is much less volatile than capital gains. As a result dividends deliver a positive return through any market conditions. A rising distribution therefore is a result of improved business conditions at the company you have invested in, which increases future returns and values.
The following consistent dividend raisers delivered higher distributions to their loyal shareholders over the past week:
Kinder Morgan Energy Partners, L.P. KMP) owns and manages energy transportation and storage assets in North America. This master limited partnership increased its quarterly distribution to $1.13/unit, which was 1.80% higher than the previous quarter and 7.60% higher than the distribution from Q1 2010. This dividend achiever has increased consistently distributions for 15 years in a row. Yield: 6.30% (analysis)
ONEOK, Inc. (OKE), a diversified energy company, operates as a natural gas distributor primarily in the United States. The company operates in three segments: ONEOK Partners, Distribution, and Energy Services. ONEOK raised its quarterly distributions by 8% to 52 cents/share. The company has raised distributions for nine years in a row. Yield: 3.60% (analysis)
ONEOK Partners, L.P. (OKS) engages in the gathering, processing, storage, and transportation of natural gas in the United States. ONEOK (OKE) is the general partner of ONEOK Partners L.P (OKS). This master limited partnership raised its quarterly distributions to $1.14/unit, which was 0.80% higher than the previous quarter and 3.60% higher than the distribution from Q1 2010. The company has raised distributions for five consecutive years. Yield: 5.70%
Family Dollar Stores, Inc. (FDO) operates a chain of self-service retail discount stores primarily for low and middle income consumers in the United States. The company raised quarterly distributions by 16% to 18 cents/share. Family Dollar Stores is a member of the dividend aristocrats index, and this dividend increase marked the 35th consecutive annual dividend increase for the company. Yield : 1.60% (analysis)
The McGraw-Hill Companies, Inc. (MHP) provides information services and products to the education, financial services, and business information markets worldwide. It operates in three segments: McGraw-Hill Education, Financial Services, and Information & Media. The company raised its quarterly dividends by 6.40% to 25 cents/share. This marked the 38th consecutive annual dividend increase for this dividend aristocrat. Yield: 2.60% (analysis)
Linear Technology Corporation (LLTC), together with its subsidiaries, engages in the design, manufacture, and marketing of linear integrated circuits worldwide. The company’s Board of Directors approved a 5.50% hike in quarterly distributions to 24 cents/share. This marked the 19th consecutive annual dividend increase for this dividend achiever. Yield: 2.70%
Enterprise Bancorp, Inc. (EBTC) operates as the holding company for Enterprise Bank and Trust Company that provides various banking products and services primarily in Merrimack Valley and north central regions of Massachusetts, and south central New Hampshire. The company raised its quarterly distribution by 5% to 10.50 cents/share. This marked the sixteenth consecutive annual dividend increase for the company. Yield: 3%
Airgas, Inc. (ARG), through its subsidiaries, distributes industrial, medical, and specialty gases, as well as hardgoods in the United States. The company announced a 16% increase in its quarterly dividend to 29 cents/share. Airgas has raised dividends for nine years in a row. Yield: 1.80%
StoneMor Partners L.P. (STON), together with its subsidiaries, engages in the ownership and operation of cemeteries in the United States. The company operates in two segments, Cemetery Operations and Funeral Homes. StoneMor announced a 1.80% hike over its previous quarter distribution to 57.50 cents/unit. This master limited partnership has raised distributions for 6 years in a row. Yield: 7.50%
Bar Harbor Bankshares (BHB) operates as the holding company for Bar Harbor Bank & Trust that offers various banking products and services to individuals, businesses, not-for-profit organizations, and municipalities in Hancock, Washington, and Knox Counties. The company raised its quarterly distribution by 1.90% to 27 cents/share. This marked the eight consecutive annual dividend increase for the company. Yield: 3.60%
Pall Corporation (PLL) manufactures and markets filtration, purification, and separation products and integrated systems solutions worldwide. The company announced a 9.40% raise in its quarterly dividends to 17.50 cents /share. This marked the seventh consecutive annual dividend increase for the stock. Yield: 1.40%
Of the companies listed above, I find ONEOK Inc (OKE), Kinder Morgan Partners (KMP) and McGraw Hill (MHP) attractively valued at the moment. In fact, I recently added to my position in the first two stocks. Linear Technology (LLTC) is one of the few tech companies which have raised distributions for close to two decades, which means that I will place it on my list for further research. Despite the fact that the stock seems overvalued by my standards, my yield on cost on Family Dollar (FDO) is 2.90%. It has also been one of the best performers in my dividend portfolio since 2008. I would consider adding to my position in the stock if it ever yields 2%, mainly due to its strong dividend growth.
Full Disclosure: Long KMR, FDO, OKE, MHP
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The following consistent dividend raisers delivered higher distributions to their loyal shareholders over the past week:
Kinder Morgan Energy Partners, L.P. KMP) owns and manages energy transportation and storage assets in North America. This master limited partnership increased its quarterly distribution to $1.13/unit, which was 1.80% higher than the previous quarter and 7.60% higher than the distribution from Q1 2010. This dividend achiever has increased consistently distributions for 15 years in a row. Yield: 6.30% (analysis)
ONEOK, Inc. (OKE), a diversified energy company, operates as a natural gas distributor primarily in the United States. The company operates in three segments: ONEOK Partners, Distribution, and Energy Services. ONEOK raised its quarterly distributions by 8% to 52 cents/share. The company has raised distributions for nine years in a row. Yield: 3.60% (analysis)
ONEOK Partners, L.P. (OKS) engages in the gathering, processing, storage, and transportation of natural gas in the United States. ONEOK (OKE) is the general partner of ONEOK Partners L.P (OKS). This master limited partnership raised its quarterly distributions to $1.14/unit, which was 0.80% higher than the previous quarter and 3.60% higher than the distribution from Q1 2010. The company has raised distributions for five consecutive years. Yield: 5.70%
Family Dollar Stores, Inc. (FDO) operates a chain of self-service retail discount stores primarily for low and middle income consumers in the United States. The company raised quarterly distributions by 16% to 18 cents/share. Family Dollar Stores is a member of the dividend aristocrats index, and this dividend increase marked the 35th consecutive annual dividend increase for the company. Yield : 1.60% (analysis)
The McGraw-Hill Companies, Inc. (MHP) provides information services and products to the education, financial services, and business information markets worldwide. It operates in three segments: McGraw-Hill Education, Financial Services, and Information & Media. The company raised its quarterly dividends by 6.40% to 25 cents/share. This marked the 38th consecutive annual dividend increase for this dividend aristocrat. Yield: 2.60% (analysis)
Linear Technology Corporation (LLTC), together with its subsidiaries, engages in the design, manufacture, and marketing of linear integrated circuits worldwide. The company’s Board of Directors approved a 5.50% hike in quarterly distributions to 24 cents/share. This marked the 19th consecutive annual dividend increase for this dividend achiever. Yield: 2.70%
Enterprise Bancorp, Inc. (EBTC) operates as the holding company for Enterprise Bank and Trust Company that provides various banking products and services primarily in Merrimack Valley and north central regions of Massachusetts, and south central New Hampshire. The company raised its quarterly distribution by 5% to 10.50 cents/share. This marked the sixteenth consecutive annual dividend increase for the company. Yield: 3%
Airgas, Inc. (ARG), through its subsidiaries, distributes industrial, medical, and specialty gases, as well as hardgoods in the United States. The company announced a 16% increase in its quarterly dividend to 29 cents/share. Airgas has raised dividends for nine years in a row. Yield: 1.80%
StoneMor Partners L.P. (STON), together with its subsidiaries, engages in the ownership and operation of cemeteries in the United States. The company operates in two segments, Cemetery Operations and Funeral Homes. StoneMor announced a 1.80% hike over its previous quarter distribution to 57.50 cents/unit. This master limited partnership has raised distributions for 6 years in a row. Yield: 7.50%
Bar Harbor Bankshares (BHB) operates as the holding company for Bar Harbor Bank & Trust that offers various banking products and services to individuals, businesses, not-for-profit organizations, and municipalities in Hancock, Washington, and Knox Counties. The company raised its quarterly distribution by 1.90% to 27 cents/share. This marked the eight consecutive annual dividend increase for the company. Yield: 3.60%
Pall Corporation (PLL) manufactures and markets filtration, purification, and separation products and integrated systems solutions worldwide. The company announced a 9.40% raise in its quarterly dividends to 17.50 cents /share. This marked the seventh consecutive annual dividend increase for the stock. Yield: 1.40%
Of the companies listed above, I find ONEOK Inc (OKE), Kinder Morgan Partners (KMP) and McGraw Hill (MHP) attractively valued at the moment. In fact, I recently added to my position in the first two stocks. Linear Technology (LLTC) is one of the few tech companies which have raised distributions for close to two decades, which means that I will place it on my list for further research. Despite the fact that the stock seems overvalued by my standards, my yield on cost on Family Dollar (FDO) is 2.90%. It has also been one of the best performers in my dividend portfolio since 2008. I would consider adding to my position in the stock if it ever yields 2%, mainly due to its strong dividend growth.
Full Disclosure: Long KMR, FDO, OKE, MHP
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Friday, January 21, 2011
Kinder Morgan Energy Partners (KMP) Dividend Stock Analysis
Kinder Morgan Energy Partners, L.P. owns and manages energy transportation and storage assets in North America. Kinder Morgan is a dividend achiever as well as a component of the S&P 500 index. It has increased distributions for the past 14 years.
For the past decade this dividend stock has delivered annualized total returns of 19.50 % to its unitholders.
At the same time company has managed to deliver an 11.30% average annual increase in its cash flow per share since 2000. The company has several projects worth $6 billion in its pipeline, which should add to incremental distributable cash flow per unit over the next few years. The Rockies Express Pipeline and the Kinder Morgan Louisiana Pipeline would help KMP benefit from increased natural gas production in the Rockies. The Midcontinent Express pipeline which is a joint venture with Energy Transfer Partners (ETP) is another project that should add to distributable cash flow per unit in the future.
The return on has mostly remained above 20% for the latter part of the past decade.
Annual distributions have increased by 11.30% on average over the past 10 years.
A 12% growth in distributions translates into the distributions payment doubling almost every six years. If we look at historical data, going as far back as 1993, we would see that Kinder Morgan has actually managed to double its distribution every five years on average.
Over the past decade the distribution payout ratio has been rather stable between 50% and 60%, with the exception of a brief spike in 2007. For this company I used the ratio of current cash flow/unit to the annual distribution/unit. A lower payout is always a plus, since it leaves room for consistent distribution growth minimizing the impact of short-term fluctuations in earnings.
The main risks for Kinder Morgan include increase in interest rates, which would increase the company’s borrowing costs to finance future projects and make its units less attractive to investors seeking its fat yield. Another risk could include adverse change in the legal structure of master limited partnerships, similar to what has happened to Canadian Royalty trusts. Thus investors should be careful not to have an overweight exposure to Kinder Morgan and Master Limited Partnerships in their portfolios.
In addition to that as a mature MLP, the company distributes 50% of incremental cash flows to the general partner, which is higher in comparison to other pipeline operators.
Overall I think that Kinder Morgan is an attractive option for investors seeking current income as well as for those seeking future distribution growth as well. The company currently yields 6.30% and recently announced that it expects to raise its annual distributions to $4.60/unit from this year’s $4.40/unit. The company does have enough distributable cash flow to cover its distributions, in addition to having a stable toll booth type income streams from its pipeline operations. I would consider adding to my position in Kinder Morgan Partners on dips.
Full Disclosure: Long Kinder Morgan Partners
At the same time company has managed to deliver an 11.30% average annual increase in its cash flow per share since 2000. The company has several projects worth $6 billion in its pipeline, which should add to incremental distributable cash flow per unit over the next few years. The Rockies Express Pipeline and the Kinder Morgan Louisiana Pipeline would help KMP benefit from increased natural gas production in the Rockies. The Midcontinent Express pipeline which is a joint venture with Energy Transfer Partners (ETP) is another project that should add to distributable cash flow per unit in the future.
The return on has mostly remained above 20% for the latter part of the past decade.
Annual distributions have increased by 11.30% on average over the past 10 years.
A 12% growth in distributions translates into the distributions payment doubling almost every six years. If we look at historical data, going as far back as 1993, we would see that Kinder Morgan has actually managed to double its distribution every five years on average.
Over the past decade the distribution payout ratio has been rather stable between 50% and 60%, with the exception of a brief spike in 2007. For this company I used the ratio of current cash flow/unit to the annual distribution/unit. A lower payout is always a plus, since it leaves room for consistent distribution growth minimizing the impact of short-term fluctuations in earnings.
The main risks for Kinder Morgan include increase in interest rates, which would increase the company’s borrowing costs to finance future projects and make its units less attractive to investors seeking its fat yield. Another risk could include adverse change in the legal structure of master limited partnerships, similar to what has happened to Canadian Royalty trusts. Thus investors should be careful not to have an overweight exposure to Kinder Morgan and Master Limited Partnerships in their portfolios.
In addition to that as a mature MLP, the company distributes 50% of incremental cash flows to the general partner, which is higher in comparison to other pipeline operators.
Overall I think that Kinder Morgan is an attractive option for investors seeking current income as well as for those seeking future distribution growth as well. The company currently yields 6.30% and recently announced that it expects to raise its annual distributions to $4.60/unit from this year’s $4.40/unit. The company does have enough distributable cash flow to cover its distributions, in addition to having a stable toll booth type income streams from its pipeline operations. I would consider adding to my position in Kinder Morgan Partners on dips.
Full Disclosure: Long Kinder Morgan Partners
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