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Growth, Yield and Kinder Morgan: The Best Pipeline Play for 2012

Finding growth is tough enough. But finding both growth and yield can seem like a gargantuan task in the current low-rate environment.

Especially so if you’re confident that the company you’re investing in is going to grow both its earnings and dividends.

But lo and behold, for 2012, I have one company that fits the bill on both counts: Kinder Morgan, Inc. (NYSE: KMI).

Kinder Morgan owns and manages a portfolio of energy transportation and storage assets. Primarily, KMI stores and transports oil, gas, carbon dioxide and gasoline, in addition to a number of other products.

It’s been called a toll road of sorts, making money off of anything and everything that flows through or gets stored in its vast network of pipelines and storage facilities.

But with natural gas prices declining as they are, what makes me so bullish over KMI?

Pipelines, Commodity Prices and KMI

Most people think that pipeline owners are affected negatively by commodity price declines. But the opposite is actually true.

When commodity prices plunge, demand increases. And that means more – not less – energy flowing through the pipelines. Price increases also aren’t detrimental (as long as they’re not long-term shocks).

We all agree that energy is in demand. And the focus of this demand is shifting to a cheaper source: natural gas.

Kinder Morgan was already a major player in the field – and that was before it recently increased its holding by purchasing El Paso Corp (NYSE: EP), another major pipeline owner.

So with the purchase of EL Paso, KMI has solidly taken over the lead with more than 80,000 miles of pipeline under its control.

That massive amount of pipeline and the deal with El Paso is huge on two counts…

First, as the major player, KMI can increase its transportation and storage rates with relative freedom – it’s not like you can just step up and build a competing pipeline overnight (see Keystone).

Second, it’s increased its growth in both revenue and income with the purchase, which means increasing dividends to shareholders this year and down the line.

Given all of that, I expect the company to increase its dividends by double digits this year, taking it from the current $1.20 per share (about 3.8%) to more than $1.35 by the end of the year.

The Future of Natural Gas

Natural gas prices are at 10-year lows and many producers are beginning to cut back on production. A significant portion of the production is already being stowed away in storage facilities, which is contributing to the glut in natural gas.

But with the advent of new technology and greater usage for natural gas – as well as the possibility of exporting liquid natural gas – the equation should turn, in due time.

The trend is unmistakable – we’re heading toward greater usage of natural gas here in the United States and worldwide. And that bodes well for the future of the company that controls a big chunk of the gas transportation system.

There are few places where you can find decent yields these days. There are even fewer places to find yields and growth. KMI, on the other hand, is a wonderful prospect for in 2012 and beyond.

Until next time,

Karim Rahemtulla