Better Dividend Buy: Enterprise Products Partners L.P. vs. Kinder Morgan, Inc.

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If you are looking for dividend income, you need to consider a number of factors beyond just yield. Dividends don't live in a financial bubble walled off from other factors that impact companies; they are just one piece of a larger puzzle. Which goes a long way toward explaining why a higher yield doesn't necessarily make Enterprise Products Partners L.P. (NYSE: EPD) a better dividend buy than Kinder Morgan, Inc. (NYSE: KMI).

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Things to like about Kinder

To be fair, there are a number of things to like about Kinder Morgan. For example, it is one of the largest midstream companies in the United States with a diversified portfolio of largely fee-based assets. It would be difficult, if not impossible, to replace the business Kinder has created. And the company is set to continue growing, with a backlog of capital projects that sits at around $12 billion.    

The big news recently, however, is that Kinder Morgan is going to increase its dividend 60% in 2018. That will be followed by increases of 25% in 2019 and 2020. That's huge dividend growth and will take the dividend from $0.50 a share annually this year to $1.25 a share in 2020.    

There's one big problem with this. These increases still won't bring the dividend back to the annualized $2.04 a share it was at prior to a dividend cut in 2016. That cut was the result of Kinder relying too much on debt. When push came to shove in a difficult market environment, management cut the dividend to find cash to continue its spending on growth projects. That's a backstory that should be concerning to anyone looking for reliable dividend income.    

Boring is better

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This is the real reason higher-yielding Enterprise is the better option here. For starter,s it is just as large and diversified as Kinder Morgan. The pipeline of capital projects at Enterprise, meanwhile, is roughly $9 billion. In other words, like Kinder, there's a clear path toward growth.    

KMI Financial Debt to EBITDA (TTM) data by YCharts

Enterprise, however, doesn't rely as heavily on debt, so it wasn't forced to cut its distribution to fund growth spending. And it didn't stop spending. In fact, in the last few years, the partnership spent around $20 billion on capital projects and a trio of opportunistic acquisitions without pulling back at all on distribution growth -- the disbursement has gone up every single quarter for over 50 quarters.    

But here's where a more nuanced view needs to be taken. Enterprise's distribution has a long history of going up around 5% a year. This is roughly what you should be expecting in the future, too. And that pales in comparison to what's on tap over the next three years at Kinder Morgan.    

I've already noted that Kinder's dividend still won't be back to its pre-cut level even after three years of big increases. That's one problem. But here's another...Kinder's current yield is around 2.6%, well below the 6.4% you can get right now from Enterprise. Using today's stock price, Kinder's yield won't reach Enterprise's level until after all three of its planned hikes. Note, however, that by that point Enterprise will likely have increased its dividend for three years, too.

More than a bird in the hand

At the end of the day, Enterprise offers investors a larger yield. That's great, but alone it doesn't explain why it's a better option than Kinder. Once you layer in the story behind Kinder's dividend growth plans, which goes back to the 2016 cut, you start to see why dividend investors should prefer the slow and steady hikes that underpin Enterprise's higher yield. Why wait on an unreliable dividend payer to catch up to a higher-yielding midstream player with a better track record of rewarding investors? So yield is an important part of this story, but it's not the whole story.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.