Kinder Morgan's Magic Compounding Machine

Kinder Morgan's Magic Compounding Machine

Just more than 10 years ago, I bought 110 shares of pipeline giant Kinder Morgan Management , spending $4,107.80 to buy that stake. As of the market's close on Oct. 3, 2013, that stake has grown to 195 shares worth $14,646.45.

That's a total return of more than 250%, driven by two key factors. The first is the rise in price of those original 110 shares. The second -- and the one that has created more value over that decade -- is a bit of good old-fashioned automatic compounding. Kinder Morgan Management pays its dividends as additional shares of stock, rather than as cash, and over the decade I've held the stock, I've accumulated 85 shares from those dividend payments.

How it all adds up
The table below shows the impact of those factors and how, together, they add up to tremendous returns. The astounding part is that as strong as the benefits from growth were -- amounting to a slightly better than 100% gain on the original investment -- the compounding beat those gains by over 50%:

Original Investment


Growth from the original shares


Compounding from dividends paid as shares


Total value


Data from author's brokerage account as of Oct. 3, 2013.

That shows the incredible power that some seemingly small dividend payments can have over time if you let them work their compounding magic. Still, in this particular case, that automatic compounding is an artifact of an incredibly complicated corporate structure that's actually made up of four separate public securities. The chart below comes from the company's recent investor presentation and shows more or less how the compounding works:

Chart from Kinder Morgan investor presentation dated Sept. 12, 2013.

The overall business is structured as a partnership. Kinder Morgan Energy Partners and El Paso Pipeline Partners are limited partnership securities that don't get a vote in the operations of the business. Still, they do get claims on a portion of the money the company generates, in the form of cash distributions.

As implied by its name, Kinder Morgan Management is involved in managing the Kinder Morgan family of companies. That particular security derives its value from Kinder Morgan Energy Partners, as the value of the stock dividends it pays is linked to the value of the Kinder Morgan Energy Partners' distribution.

To round out the company, Kinder Morgan owns the general partner in charge of the whole group, and its shareholders have the corporate voting authority. As the general partner, Kinder Morgan gets claim on all the cash flows after the limited partners take their stakes.

What that complexity means
That complexity means that it's impossible to peg a value on the Kinder Morgan or Kinder Morgan Management securities on their own. Instead, you have to consider the operations of Kinder Morgan Energy Partners and El Paso Pipeline Partners, whose cash-generating abilities drive the values of those other two securities.

There may be a lot of moving parts, but the compounding action created at Kinder Morgan Management by those dividends paid as shares have generated some awesome total returns. There are still no guarantees in the market, but the power of compounding dividends has been an incredible force for wealth creation for generations. And as long as companies pay their dividends, investors like you have the opportunity to put that compounding magic to work.

For More Information on Kinder Morgan's Compounding Machine
If someone asked you, "Why invest in Kinder Morgan?" could you truly answer them? To be honest, few investors could. That's because most of the company's secrets -- the ones that make savvy market watchers rich -- often fly below the radar. If you want an edge on other Kinder Morgan investors, be sure to check out "5 Secrets to Kinder Morgan's Future" from The Motley Fool. This free guide includes actionable advice that you can put to use right now! Just click here now for instant access!

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Chuck Saletta owns shares of Kinder Morgan Management and Kinder Morgan. The Motley Fool recommends El Paso Pipeline Partners LP and Kinder Morgan. The Motley Fool owns shares of Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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