If you are looking at Kinder Morgan (KMI 0.31%) and its 4.1% dividend yield, you should also consider Enterprise Products Partners (EPD -0.06%) and its 6.8% distribution yield. But the reason for preferring Enterprise over Kinder Morgan is only partly to do with the yield, particularly if you are a dividend-focused investor. Here's what you need to know to decide between these two midstream giants.

What do Kinder Morgan and Enterprise do?

From a big-picture perspective, both Kinder Morgan and Enterprise Products Partners operate in the energy sector. This sector is known for being volatile, thanks to the huge impact that oil and natural gas prices have on the financial results of most energy companies. But not all energy companies, since Kinder Morgan and Enterprise are largely toll takers, charging fees for moving oil and natural gas around the world.

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Essentially, these midstream players sit between the upstream (energy production) and the downstream (chemicals and refining). The pipelines, storage, and transportation assets they own generate reliable fees, with the price of the commodities moving through their systems far less important than demand for the services they provide. And demand for energy tends to be fairly high even when energy prices are low. So both Kinder Morgan and Enterprise have attractive and reliable business models in what is an otherwise volatile industry.

From this perspective, Kinder Morgan and Enterprise are very similar. They are also very similar when it comes to the size of their asset portfolios, which are among the largest in North America. In fact, both businesses have market caps in the $60 billion to $70 billion range. But they aren't interchangeable.

Why most investors will likely prefer Enterprise

Midstream investments are generally considered for the reliable income stream they provide to investors. The lofty dividend yields of both Kinder Morgan and Enterprise are part of that story. However, there's a back history that investors shouldn't ignore.

In 2016, the energy sector was going through a difficult period. Enterprise increased its distribution. Kinder Morgan cut its distribution by 75%. To be fair, it was the right move for the company, but it was a terrible outcome for income investors. The real problem, however, is that just a couple of months prior to the cut, management was guiding for a dividend increase of as much as 10%.

The cash freed up from the dividend cut was used to strengthen Kinder Morgan's balance sheet and to invest in growth opportunities. So the cut made the business stronger, with management eventually getting dividend growth back on track. But even here there was a problem. It set out an aggressive dividend growth schedule and then fell short of that plan during the difficult energy market in 2020, during the coronavirus pandemic. In other words, Kinder Morgan has let dividend investors down during each of the most recent energy industry downturns. Enterprise increased its distribution modestly in 2020, but that is basically what it has done for years.

Erring on the side of caution will be the best choice for most investors

In fact, at this point, Enterprise has reliably increased its distribution year in and year out for 26 consecutive years. Kinder Morgan looks like it is in much better financial and business shape today than it was in 2016. And the 2020 dividend miss was reasonable, too, given the uncertainty at the time. But if being able to trust how the management teams of the investments you own address what's important to you, Enterprise will be the better investment option. And you'll collect a higher yield while you're at it.