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Home > Investing, Portfolio Updates > Adding KMI Here

Adding KMI Here

The market swooned today, and I took an opportunity to buy into Kinder Morgan, Inc (KMI) at $38.50/share.

I especially like buying into today’s market because Kinder Morgan just went ex-dividend about a week ago. Although I like collecting dividends, buying just after an ex-dividend at an even lower price after subtracting the dividend is a good way to buy shares. I got the dividend by a lower buy-in price, which is even better than a payment.

The Sweet Spot

Kinder Morgan (KMI) is an investment in what I call the dividend growth sweet spot. It has a combination of a high yield and a high dividend growth rate. There are companies that will grow the dividend faster and companies that have higher initial dividend yields (such as Kinder’s other issue, KMP or KMR).

But, the question is which investment will get the most return, more easily?

The company has projected 12% earnings growth/year as it rolls out new assets over the next 5 years. Wall Street consensus number is about 15%/year (according to Yahoo!), which is higher.

I could invest in Family Dollar (FDO), which in the past 5 years had a 19%/year earnings increase rate. The Wall Street consensus projection for the next five years is about 12%/year, but it might be higher. Family Dollar needs many things to happen and there is a fair amount of uncertainty that they will achieve that earnings growth rate. Plus, it has a dividend yield of only about 1.7%.

FDO is a good company and probably will be a good investment going forward.

The difference with an investment like KMI is that the earnings growth is very achievable and much more certain to occur. Here’s why:

  1. At a 4% current sustainable dividend yield, you will earn a good annual income return regardless. If the company doesn’t execute well over the short term, you can reinvest at a lower price and get an even better yield. The higher yield provides some return safety.
  2. The company is arguably the best run MLP and has the track record to prove it.
  3. The earnings growth is based upon concrete, measurable returns on pipeline assets that are yet to be deployed. They don’t need customers to show up at a store or  someone to click on a link. All they need to do is to deploy the assets.
  4. The company announced their growth plans after the merger with El Paso Partners was announced. Since then, they have raised their dividend about 20%, consistent with what they said they were going to do.

It is possible that the price could drop lower based upon market conditions.  If it does, I’ve still got some dry powder to add to my position.

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