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In October 2006, I purchased Altria (MO) and held it for a short period of time before selling it. I have always regretted selling Altria as the company and all its spin-offs have performed very well. I wrote a previous article (here) where I describe in more detail how selling Altria was a mistake and how I would have benefited if I had held the stock. I tell you that because I do not want anyone to think this is a negative Altria article, it is not. Altria has historically been an outstanding company to own and has continued to perform well, up approximately 20% this year, not including the healthy 5% dividend. What I hope to do in this article is to let readers know there is another company that may reward investors as richly as Altria has.

Kinder Morgan (KMI) is the general partner and owns the incentive rights to Kinder Morgan Energy Partners (KMP) and El Paso Pipeline Partners (EPB). Kinder Morgan is the largest midstream and the third largest energy company in North America. KMI owns an interest in or operates approximately 75,000 miles of pipelines and 180 terminals. The pipelines transport natural gas, refined petroleum products, crude oil, carbon dioxide (CO2) and more. KMI also stores or handles a variety of products and materials at terminals such as gasoline, jet fuel, ethanol, coal, petroleum coke and steel.

Kinder Morgan management has communicated they intend to raise their dividend 12.5% a year through 2015 and 10% long term (here). Assuming they are true to their word, the chart below shows what their future dividend payout will look like. Note, for this exercise, I assume the KMI stock price never changes from its current $35.44. This allows me to calculate yield based on today's price; obviously the stock price will fluctuate during the next five years.

Year% Dividend Increase$ DividendYield
2012 $1.404%
201312.5%$1.584.50%
201412.5%$1.775.00%
201512.5%$1.995,70%
201610%$2.196.20%
201710%$2.416.80%

As you can see in the chart, the dividend will see a healthy increase, just a little less than doubling in five years.

Altria has been a dividend growth investor's dream, constantly increasing their generous dividend and maintaining a well above average yield. However, I have noticed that Altria has fallen into a pattern of increasing their dividend $0.12 a year. As the chart below shows, they have raised the dividend $0.12 a year every year since 2009. Note - in 2009/2010, they raised the dividend twice during the year, but the end result was still $0.12. Dividend information can be found here.

Increase DatePrevious DividendNew Dividend% Increase
October 2008$1.16$1.2810.4%
October 2009$1.28$1.366.3%
April 2010$1.36$1.403.0%
October 2010$1.40$1.528.6%
October 2011$1.52$1.647.9%
October 2012$1.64$1.767.4%

Although one cannot assume that a yearly $0.12 dividend increase is baked in forever, I believe it is safe to assume that Altria will be hard pressed to raise the dividend much more than $0.12 a year. Altria's payout ratio, depending where you look, is 80% or above, which does not leave much room for larger increases. In addition, Altria's dominant product, cigarettes, has seen sales fall for several years. Altria's outstanding management team has been able to grow earnings by increasing prices on cigarettes and by expanding into smokeless tobacco products, cigars and wine.

The chart below shows what Altria's dividend and yield would look like over the next five years assuming Altria continues to increase their dividend $0.12 a year. As I did with KMI, I assume MO's stock price never changes from the current $34.45.

Year% Dividend Increase$ DividendYield
2012 $1.645%
20137.30%$1.765.10%
20146.90%$1.885.50%
20156.40%$2.005.80%
20166.00%$2.126.20%
20175.70%$2.246.50%

As you can see in comparing the charts, within four years, KMI starts to pay a larger dividend than MO. By increasing the dividend each year by a larger percentage, KMI catches MO and steadily increases the lead as the years progress.

I do not claim the numbers in the chart above are written in stone. They should be looked at for general comparison. The important point is KMI intends to increase their dividend double digits for the next several years and MO's dividend increases have slowed down. If that trend continues, KMI will, in a relatively short period of time, pay a larger dividend.

I have always admired Altria's management; I think they are among the best. They are under increasing Government scrutiny and constant attack from legal firms looking for a big pay day. Despite that, they have managed to keep Altria growing and the cash flowing. Although I do not own the stock, I still listen to their webcasts from industry conferences and quarterly earnings calls because I am enamored with how they maintain their business. If Altria were to pull back in price, I would take a long hard look at owning it.

I own KMI, I believe KMI to be an excellent long-term hold as Richard Kinder intends to aggressively increase the dividend, which should help elevate the stock price. Kinder Morgan has unrivaled assets, with the completion of the El Paso purchase, Kinder is the largest natural gas pipeline operator in the country. In addition, Kinder is the largest CO2 pipeline operator in the country, it is the largest terminal operator in the country and just for good measure, it is the second largest oil producer in Texas.

Action - If you own Altria you should continue to hold it, I am not recommending anyone sell MO. If you own KMI, I think you have time to add to your holding and if you don't own Kinder I think you should consider it. Both Kinder Morgan and Altria are strong companies with great cash flow which should reward investors for years to come.

Source: Kinder Morgan: A Better Dividend Growth Stock Than Altria