The company is a great option for generating passive income.
The energy industry is a great spot if you’re looking for a high-octane dividend these days. It currently provides the highest dividend yield among S&P 500 sectors.
Kinder Morgan (KMI -1.22%) is one of the leaders in the group, with a dividend yield currently around 6%. That big-time payout is on rock-solid ground, making it ideal for income-seeking investors.
Drilling down into Kinder Morgan’s dividend
Kinder Morgan is a leading dividend stock:
As that slide showcases, Kinder Morgan currently offers a top-10 dividend yield among S&P 500 members. At around 6%, it’s nearly 50% higher than the average energy stock and over three times more than the S&P 500’s average of less than 2%.
While higher-yielding stocks often have higher risk profiles, that’s not the case with Kinder Morgan. The natural gas pipeline giant produces relatively stable revenue backed by long-term contracts and government-regulated rate structures. That gives it lots of visibility into its cash flows.
The company expects to produce $4.8 billion, or $2.13 per share, of distributable cash flow this year. That’s about 3% below 2021’s total because of the impact of higher interest rates on its floating rate debt. However, it will still provide the company with more than enough money to cover its dividend and capital expenses.
Kinder Morgan expects to increase its already sizable dividend payment by 2% this year to $1.13 per share, giving it a conservative 53% dividend payout ratio. That will enable it to produce about $2.26 billion in excess cash, more than enough to cover its planned $2.1 billion of expansion-related spending.
Meanwhile, the company has a strong balance sheet. Kinder Morgan expects leverage to be around 4.0 times this year, well below its 4.5 times target. That gives it about $3.6 billion of balance sheet capacity to opportunistically repurchase shares, invest in additional organic expansion opportunities, or make acquisitions.
The big yield should keep rising
As noted, Kinder Morgan has already budgeted for a 2% dividend increase this year. That will mark its sixth straight year of increasing the dividend.
Given the company’s already sizable yield, it expects to deliver modest dividend growth in the coming years and will return additional excess cash to shareholders through its repurchase program. The company recently added $1 billion to its authorization, boosting the total to $3 billion ($2.1 billion of which remains available).
The company’s distributable cash flow has declined over the past couple of years because of interest rates and other headwinds. However, it sees its expanded set of expansion projects driving “nice growth in 2024 and beyond,” according to comments by co-founder and Executive Chairman Richard Kinder on the fourth-quarter conference call. The growing cash flow should support its ability to continue increasing its dividend over the next couple of years.
Meanwhile, the company continues to work on securing additional growth opportunities. Demand for natural gas continues to grow, especially from liquified natural gas (LNG) facilities. The company’s extensive pipeline footprint puts it in an excellent position to deliver more gas to those facilities in the future.
Kinder Morgan is also starting to slowly pivot toward lower carbon energy opportunities. It’s building several renewable natural gas facilities and renewable fuels hubs. It’s also working on the first of what could be many carbon capture and sequestration projects. Further investments in organic growth and potential acquisitions will help grow the company’s cash flow, giving it the funds to continue delivering modest dividend growth.
A top-tier dividend stock
Kinder Morgan offers one of the highest dividend yields in the S&P 500. Further, that payout is on rock-solid ground. With a strong financial profile and visible growth prospects, the company should be able to continue growing that payout in the future. Those features make Kinder Morgan an excellent stock for those seeking to generate lots of dividend income.
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