Energy Transfer vs. Kinder Morgan: Which Natural Gas Pipeline Stock Is the Better Buy for the AI Power Boom?

Energy Transfer (TXSE: ET) and Kinder Morgan (NYSE: KMI) are two of the largest midstream businesses in North America. Although both have cut their dividends in the past, they are growing them at a steady clip today. However, as artificial intelligence (AI) shifts the demand story in the electricity sector, Kinder Morgan is likely the better-positioned business, if you're willing to pay for it. Here's what you need to know to choose between these two midstream operators.

What does the midstream have to do with AI?

There is a massive effort underway to build the infrastructure that supports artificial intelligence. However, at its core, AI is just a fancy computer program. It doesn't exist without electricity. The more AI infrastructure that's built, the more electricity is needed. Between 2024 and 2030, the International Energy Agency expects electricity demand from AI to increase "more than four times faster than the growth of total electricity consumption from all other sectors."

Image source: Getty Images.

The world needs more electricity in a big way, with some estimates that electricity demand will grow by 60% between 2025 and 2045. That's up from growth of just 10% between 2005 and 2025. Pipeline companies are a vital part of supplying this electricity because natural gas is increasingly being used to generate power.

There's more good news. Businesses like Energy Transfer and Kinder Morgan largely charge fees for the use of their energy infrastructure assets. So while commodity prices can be highly volatile, midstream companies largely sidestep that risk. The volume flowing through their systems is more important than the price of what is being moved. In other words, Energy Transfer and Kinder Morgan are likely to benefit from AI regardless of what happens to natural gas prices.

Which is better positioned: Energy Transfer or Kinder Morgan?

There is a notable difference between Energy Transfer and Kinder Morgan regarding natural gas. Natural gas makes up around 35% of Energy Transfer's business, while Kinder Morgan's exposure is 67%. In fact, Kinder Morgan claims to own the largest natural gas transmission network in the United States.

From this perspective, Kinder Morgan is better positioned to benefit from increasing demand for the natural gas used to generate electricity. If that is all you are focused on, it is probably the better choice for your portfolio.

The problem is that Kinder Morgan's dividend yield is only 3.4%, which is far below the 6.7% yield that you could collect from Energy Transfer. To buy either for a dividend portfolio, you need to accept that both have both cut their dividends in the past. They are growing again, as noted above. In fact, slow and steady dividend growth is likely to be the norm for each at this point. Still, if income is your real focus, then Energy Transfer is the obvious winner. And, while it may not benefit as much as Kinder Morgan from AI's voracious appetite for electricity, it will still benefit.

What are you really trying to achieve?

The simple answer here is that Kinder Morgan is more leveraged to natural gas than Energy Transfer. But that's looking at the comparison in something of a vacuum. Wall Street clearly knows Kinder Morgan is tied into the AI story, and it has been priced accordingly. That has left the stock with a relatively low yield in a sector known for providing attractive yields. In other words, if you are trying to live off of the income your portfolio generates, you may be better off with less natural gas exposure and more yield. And that could make Energy Transfer the more appropriate choice.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool has a disclosure policy.