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Solid Dividend Stock: Kinder Morgan Energy Partners (KMP)

KMP is my favorite conservative dividend stock that has consistently increased their distribution and stock price in good as well as difficult times. I started purchasing shares of Kinder Morgan Partners (KMP) in October of 2002 at prices between $30 and $32 a share. KMP is now my largest portfolio holding and I have a dividend yield of over 9% on my original cost of shares. This means that as long at the dividend increases with the rate inflation I will beat my 8% expected rate of return needed to make my retirement goal with the dividend alone and no stock appreciation.

On July 16, 2008, KMP increased its quarterly cash distribution per unit to $0.99 ($3.96 annualized) from $0.96 ($3.84 annualized) which is up 16% over Q2 2007. Distributable cash flow per unit before certain items was $1.14, up 31 percent from $0.87 per unit for the comparable period last year. KMP has increased the distribution 33 times since current management took over in February of 1997.

KMP operates mostly fee-based businesses and is the largest independent transporter of refined petroleum products in the United States, a major transporter and storage operator of natural gas, the largest transporter and marketer of CO2 for enhanced oil recovery projects in North America, the largest independent terminal operator in America and a large transporter of crude oil and petroleum products from Alberta to British Columbia, Washington state and the midwestern United States.

KMP focuses on growing stable, fee-based assets which are core to the energy infrastructure through incremental acquisitions and expansions. This is a classic fixed cost business with very little variable costs.

S&P has a recent summery on KMP that states that their natural gas pipelines and terminal operations will be the main driver of earning for the company. KMP has over $6 billion of investments planned for the next four years as part of their long term growth plan. They should complete the Rockies Express Pipeline in 2009 which will allow KMP to benefit from increased natual gas production in the Rockies. They are working on the Lousiana LNG pipeline which will take advantage of the growing importation of LNG to the gulf coast. S&P has rated KMP as a 5 Star Strong Buy.

Master Limited Partnerships such as KMP also possess a unique tax advantage in that 80% to 90% of distributions typically are tax-deferred for federal income tax purposes. The distributions are subject to tax only when the units are sold, and if the units are held for more than a year, they are taxed as long-term capital gains (currently 15%) rather than ordinary income (marginal rates as high as 35%), as is the case for corporate bonds.

Disclosure: The Div Guy owns shares of KMP at the time of this post.

This article was written by The Div Guy. You may email questions or comments to me at