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My Recent Dividend Buys

September 08, 2012 | About:
A rising stock market is not my friend. More expensive stocks and higher valuations puts me in the unfortunate position where new capital does not go as far. Higher priced stocks provide an equity investor a lower percentage of ownership of said companies when purchased at a static dollar amount, and also provide a lower long-term total return and lower entry yield. A stock market that experiences drastic upward moves may look good on paper, as the portfolio value will inevitably follow the market's march higher, but these increased stock values only serve you if you sell your stocks. As a dividend growth investor, my primary goal is to build an ever-rising dividend income stream from great companies with economic moats and strong fundamentals. That stream is hard to increase if I'm selling stocks.

This all being said, I also believe in finding value in all market conditions. I do not believe in market timing. If the DJIA falls 500 points tomorrow is it a good time to buy? How will you know? Maybe it'll fall another 500 points the following day. I tend not to concentrate on the overall market valuations. I do use the DJIA, S&P 500 and Nasdaq numbers as rough overall guides to broad equity valuations, but it's the individual companies I'm investing in, not the market. So, I decided to put further capital to work today.

As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.

I purchased 60 shares of Kinder Morgan Inc. (KMI) on 9/7/12 for $35.62 per share. This is a company that was high on my watch list for this month, and I decided to pull the trigger today.

As I recently discussed, KMI is an interesting stock. When buying KMI, you are buying into the General Partner of the Kinder Morgan Energy Partners Limited Partnership (KMP). With KMI, however you get a couple of advantages. You get none of the tax consequences (K-1 anyone?) that come with owning a Master Limited Partnership, but you still get to invest in the tax-advantaged business structure that is a MLP. You also get accelerated dividend growth when you invest in the GP, because of what's called the Incentive Distribution Rights (IDR). A small drawback with investing in the GP is that the entry yield is typically lower than what comes with investing directly in the LP.

Kinder Morgan currently operates the largest natural gas pipeline network in North America. This investment gives my portfolio a holding in the natural gas/infrastructure industry. By investing in a pipeline, this gives me access to a business that effectively operates an underground energy highway that charges toll-like fees for use of its pipeline.

An excellent article that defines how a Master Limited Partnership works, and how the General Partner can be a fantastic investment is here:

Discover Master Limited Partnerships

My entry yield on my investment with KMI is 3.93%, which is very attractive considering the growth in the dividend that KMI has provided over the last year. They've grown the dividend by over 157% in just over a year, and the growth should be strong over time because of the IDR. This investment will add $84.00 to my annual dividend total based on the current payout of $0.35 per share per quarter. The P/E ratio on this stock is quite deceiving because of how the GP is set-up and how the profitability and performance of the GP is based on the profitability and growth of the LP.

Using a Dividend Discount Model, and using a very conservative 10% dividend growth rate and an aggressive 14% discount rate I get a fair value of $38.50, which is about 8% higher than it currently trades for. Not much of a margin of safety, but I think the dividend growth going forward will be higher than 10%. I personally believe the stock is worth more than $40 currently.

With this recent buy I now have 29 positions in my portfolio.

Some analyst opinions on my recent purchase:

*Morningstar currently rates KMI as a 3/5 star valuation.

*S&P currently rates KMI as a 4/5 star Buy.

I'll update my Freedom Fund in early October to reflect my recent addition.

Full Disclosure: Long KMI

What are you buying?

About the author:

Dividend Mantra
Trying to retire by 40 by investing in dividend growth stocks and living frugally, valuing time over money.

Visit Dividend Mantra's Website


Rating: 5.0/5 (4 votes)

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