BP Prudhoe Bay Royalty Trust (NYSE: BPT) currently pays a jaw-dropping dividend that yields over 20%. That trumps Kinder Morgan's (NYSE: KMI) payout, which looks paltry in comparison at 4.5%. Given the difference, this much higher dividend might tempt some yield seekers to consider investing in the royalty trust.
That higher current payout, however, isn't as good as it seems. That's why I think investors should forget about BP Prudhoe Bay Royalty Trust and buy Kinder Morgan for its dividend instead.
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Running out of fuel
A royalty trust like BP Prudhoe Bay is a very different investment entity than a company like Kinder Morgan. One of the most important differences to note is that the former has a finite life, whereas the latter theoretically can last forever. That's because the trust's value comes from royalties it receives from producing oil fields, in this case from BP's (NYSE: BP) interest in the Prudhoe Bay Field of Alaska. Once those wells run dry, the royalty payments will end.
That termination point is getting closer by the day. In BP Prudhoe Bay's last annual report, the trust noted that based on oil prices in 2017, it "estimated that royalty payments to the Trust will continue through the year 2019." However, the payments would be "zero in the following year." In other words, investors likely will only be able to collect this sky-high dividend for another year. While higher oil prices throughout much of 2018 could extend the life of the trust further into the future, depending on BP's planned development activities, dividends paid to investors will eventually cease. That's why it's not a worthwhile long-term investment for income seekers.
Plenty of gas to keep growing
Kinder Morgan, on the other hand, should pay a growing dividend for many years to come. The natural gas pipeline giant already anticipates boosting its payout 25% in 2019 and by that same rate next year too. Because of that, investors who buy the company's stock today could lock in a more-than-7% yield for 2020, which incidentally is the year that BP Prudhoe Bay investors might not collect any more income.
Meanwhile, the company should be able to continue increasing that payout for many more years. One factor supporting that view is that the company has several expansion projects in development that could drive growth beyond 2020, including three oil infrastructure investments that could come online in the late-2020-to-early-2022 time frame. In addition to those identified opportunities, Kinder Morgan should be able to continue expanding its oil and gas infrastructure footprints in future years, given the forecast that the industry needs to invest over $800 million in building new assets through 2035. In the company's view, it should be able to secure $2 billion to $3 billion of new expansions per year, which at the low end should support more than 4% annual earnings growth. That ability to steadily expand its asset base and its cash flow should give Kinder Morgan the funds so that it can continue growing its dividend well beyond 2020.
A better option for the long term
As things stand right now, BP Prudhoe Bay will cease paying dividends to shareholders after this year, which is why income-seeking investors should forget about its sky-high payout. Kinder Morgan, on the other hand, expects to increase its dividend 25% in each of the next two years, and it should be able to continue growing it in those to come as it keeps expanding its asset base. That growing income stream makes it a much better option for income investors over the long term.
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