A couple of weeks ago a bunch of us felt a disturbance in the Force – sadly it was not the new Star Wars movie. Indeed, something terrible had happened. Dividend growth investor darling Kinder Morgan fell from its pedestal after its stock price declined for months. On top of that the company had to announce a dividend cut, basically right after I purchased my first shares.
From a forward dividend guidance of at least 6% annual growth at the end of October to a 75% cut at the beginning of December, that’s a tough pill to swallow for many investors, especially with an income stock like Kinder Morgan (NYSE:KMI). While I agree that it was the right move to make, because it limits the company’s need of external capital, I can’t wrap my head around the events that lead up to the actual cut.
Without going into too much detail, here’s the gist of it: Kinder Morgan sold debt at an unreasonably high rate of almost 10%, then acquired full ownership of Natural Gas Pipeline Company of America, a debt-ridden sinking ship, which in turn increased their leverage even more. This cocktail of bad decisions made Moody’s cut KMI’s rating, which further increased the cost of external capital.
I can live with a dividend cut, but not with bad management and conflicting communication towards shareholders. That’s why I decided to cut the ties and take my loss for what it was, as I’ve explained in the most recent net worth update.
Of course, the entire debacle lead me to re-analyse my previous decision on the company and rethink my dividend growth strategy. As such, the only good thing to come out of my KMI positions is a couple of lessons learned, like Lanny and Bert from Dividend Diplomats also noted.
So get comfortable and find out what my lessons learned are!
(Draw me like one of your French girls.)
The downside of a closely knit community is sheepish tunnel vision
Ah, finally, NMW! What’s up with the sheep plastered all over this post?!
Exactly, this is the main point I want to make because it’s what I blame myself most for in the Kinder Morgan story. Because I had been so busy working, I forgot my due diligence when investing in KMI.
Yes, I had looked at the company previously – around August, September – but I didn’t take the time to go over all the numbers again in November when I initiated my purchase. The fact that other community members were also buying, reassured me in my previous assessment.
I was a fool and I only have myself to blame. When you’re in the middle of a herd of sheep you can’t see the warning signs at the outskirts of the herd. I should have at least tried to see if there were any rather than mindlessly following the other sheep around me.
Green grass can be deceptive
Not too long ago I wrote a post on why the grass always looks greener on the other side of the fence. And boy, does it apply to this situation.
When your own portfolio is yielding a solid 2.6% after taxes, it’s very tempting to jump into a stock that offers you 6% after taxes. Who doesn’t like a return that’s 130% higher than you’re currently enjoying?
Don’t just jump into a stock because it offers a higher yield than others – there’s often a very good reason why the yield is much higher. Yield carries a price! And that price is called increased risk.
Personally, I can’t even rationalise why I would chase higher yield seeing that I smashed the dividend income goal I set for myself this year by a large margin. So this is strike two on my account.
Stocks are wolfs in sheep’s clothing
Don’t worry, this paragraph won’t go out on a tangent how stocks are bad, because they really aren’t. However, even the most stable and securest of stocks remain a wolf in sheep’s clothing.
Stocks fluctuate on a daily basis, but on top of that no single business model consists of a silver bullet to remaining profitable in the long-run. Just look at the difficulties that BHP Billiton (LON:BLT) is currently facing. Or even the (minor) issues that dividend aristocrat Procter & Gamble (NYSE:PG) is experiencing.
As investors we should never forget that.
However, what is clear to me from my experience with Kinder Morgan is the fact that I prefer business models that are more tangible. Yes, KMI’s pipeline operations are easy to understand – as is evidenced with the toll-road metaphor a ton of us DGI investors use – but it’s not as consumer-driven as I would like. Going forward I’m going to take that into account when deciding on investment opportunities.
There you have it, my three main lessons on investing and dividend stocks. Bottom line: I shouldn’t sheepishly run after the next big thing.
Four days before Dividend Growth Investor partly swapped out his KMI shares for Diageo (LON:DGE), I did exactly the same thing – again, be mindful of tunnel vision! This move is exactly in line with what I described above: Diageo is a mostly consumer-driven business with a pretty average yield and according long-term risk.
As a result, my forward dividend income decreased, but I once again sleep well at night. Besides, the additional shares of Diageo yield about €20 after taxes. Not too shabby!
Were or are you still a KMI investor? And how did you experience the ride of the past few months? Let everyone know in the comments.