With a nearly $38 billion market cap, Kinder Morgan (NYSE:KMI) is one of the largest midstream companies in North America. ONEOK (NYSE:OKE), at a roughly $26 billion market cap, is one of Kinder's more sizable competitors. Both are structured as corporations, not master limited partnerships. However, they are not interchangeable. The better option today looks like ONEOK. Here's why.

Big dividend hikes

Kinder Morgan currently offers investors a robust yield of 4.6%, more than twice what you'd get from an S&P 500 index fund. It hiked its dividend by an incredible 60% in 2018, with plans for 25% increases in 2019 and 2020. In other words, the dividend will go from $0.50 per share per year to $1.25 in a short timeframe. Based on today's stock price, the yield will be roughly 7% in 2020. That's a pretty enticing dividend growth plan, especially when you consider that Kinder has one of the largest and most diverse midstream businesses in the industry.     

A man turning valves on a pipeline

Image source: Getty Images.

The fly in the ointment is that Kinder Morgan's dividend was cut 75% dividend in 2016. There's an important backstory that investors need to understand. The company has historically made greater use of leverage than its midstream peers, an issue exacerbated by its decision to buy three of its controlled limited partnerships leading up to the cut. The mid-2014 oil downturn coupled with the acquisitions helped to push the company's debt-to-EBITDA ratio above nine times, a highly concerning figure. 

Capital markets weren't a desirable financing option in 2016, partly because of industry conditions and partly because of Kinder Morgan's already high leverage. Management had to make a decision between funding its growth plans or funding its dividend. Growth won, which was good for the company but not so good for income investors who had come to rely on Kinder Morgan's dividend.

The thing is, investors had every reason to expect continued dividend growth. Management was projecting a dividend increase of as much as 10% in 2016 just a couple of months before it announced the dividend haircut. There are major trust concerns to think about here.

A different path

ONEOK bought its controlled partnership in 2017, following a similar path to Kinder Morgan. The move was accompanied by a peak in ONEOK's debt levels and a spike in its share count. So far the story is pretty similar. However, it's been roughly a year and ONEOK hasn't cut its dividend. In fact, it raised it 21% following the completion of the merger and has hiked it every quarter since. The dividend is now roughly 40% higher than it was prior to the acquisition of its controlled partnership. Looking to the future, the company's $6 billion in capital spending plans should support roughly 10% dividend growth over the next few years. Perhaps not as impressive as what Kinder Morgan is promising, but still pretty desirable.     

In addition to the dividend hikes, however, ONEOK has also reduced leverage. Debt to EBITDA spiked at nearly seven times, but is now down below four. Most of that change has come from business growth, with the change in long-term debt relatively modest. ONEOK is roughly in line with key competitors with regard to leverage today. By comparison, Kinder Morgan's debt to EBITDA has fallen to roughly six -- an improvement, but still at the high end of the industry.

KMI Financial Debt to EBITDA (TTM) Chart

KMI Financial Debt to EBITDA (TTM) data by YCharts.

But here's the bigger takeaway. Reducing leverage was one of ONEOK's goals following the merger, as was continued dividend growth. It lived up to both promises and looks as if it will keep doing so. While nobody knows what the future holds, ONEOK has done a far better job rewarding investors and following through on its goals. With leverage back to reasonable levels, ONEOK and its 5.5% yield is a better option than Kinder Morgan for income investors today. And that's only partly because of the yield advantage it offers right now.

Go in with your eyes open

Kinder Morgan isn't a poorly run midstream company by any stretch of the imagination. And the dividend growth potential is very enticing. However, it remains highly leveraged compared to peers. And there's a trust issue when it comes to dividends that income investors shouldn't forget about just because dividends are growing again. ONEOK's dividend growth prospects are material, though lower, but the company managed through a similarly difficult period without a dividend cut. And now that it's back in line with peers when it comes to leverage, it's the better option of this pair for most income investors.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends Enterprise Products Partners, Magellan Midstream Partners, and ONEOK. The Motley Fool has a disclosure policy.