Please ensure Javascript is enabled for purposes of website accessibility

2 Top Dividend Stocks to Buy Right Now

By Rekha Khandelwal - Mar 23, 2020 at 9:16AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

These two dividend stocks' yields just got better.

In volatile times, a steady regular dividend income is a big relief. It's also the time when you get stocks at bargain prices. Yields of two such energy stocks -- Kinder Morgan (KMI -0.95%) and ONEOK (OKE -1.12%) -- have become more attractive after their recent fall. The gas-focused players are getting crushed due to the novel coronavirus and lower oil prices, though these should not get impacted as much.

Stronger than before

Kinder Morgan has learned how to survive in lower commodity prices the hard way. After it was forced to slash dividends at the end of 2015, the company has taken significant steps to reduce its leverage and commodity price exposure. Kinder Morgan has reduced its net debt by around $10 billion in the past five years. A significant portion of the company's cash flows are now backed by long-term take-or-pay contracts. At the same time, it is growing earnings steadily, driven by higher natural gas transport volumes.

A roll of hundred-dollar bills sits next to a sticky note reading 'dividends.'

Image source: Getty Images.

Still, Kinder Morgan's earnings are not immune to a sustained fall in commodity prices or weakness in demand due to COVID-19. These factors may ultimately reduce U.S. drilling activity, impacting the company's transport volumes. Notably, reduced drilling for oil impacts natural gas production as well, as the two commodities are produced together from most wells. Having said that, the company is not as directly prone to the impacts of lower prices as pure-play upstream players are. It also has the financial strength to sail through periods of volatility while keeping dividends intact. The company expects $2.2 billion in excess distributable cash flow for 2020. That's after paying dividends, which are expected to rise by 25% for the year. 

ONEOK's fall

Crude oil prices, and ONEOK stock, fell steeply after the OPEC+ failed to reach a deal to cut output. There are a couple of reasons why ONEOK fell more steeply than its midstream peers. One, the company's natural gas gathering and processing segment exposes it to commodity prices, although to a limited extent. Around 15% of the segment's earnings are based on commodity prices. Secondly, the segment's fee-based earnings may be directly impacted if production declines due to lower commodity prices. Lower production may also impact ONEOK's liquids and gas transport volumes, though the contracts here have volume commitments. However, if the producer customer goes bankrupt or is unable to pay, ONEOK's earnings will take a hit.

Lower commodity prices will also impact ONEOK's growth plans. It has already announced a $500 million cut in its 2020 planned capital expenditure. While this may impact the company's earnings growth, the extent of the stock's fall looks like an overreaction. ONEOK still plans to spend $2 billion on growth projects in 2020.

KMI Dividend Yield Chart

KMI Dividend Yield data by YCharts.

ONEOK has not yet lowered its earnings guidance for 2020. Several factors support the company's expected earnings growth. More than 550 million cubic feet per day of natural gas gets flared in North Dakota currently, highlighting the need of takeaway capacity. Similarly, low-cost production in Permian Basin looks more insulated from a drop in commodity prices. ONEOK's Permian volumes are fully contracted.

ONEOK's strong distributable cash flow of 1.4 times its dividends for 2019 provides it with the flexibility to weather the challenging price environment. Its strong balance sheet further adds to its flexibility. Having said that, if commodity prices remain suppressed for long, producer bankruptcies are sure to rise. Midstream players like ONEOK will surely face some heat then. Overall, while the earnings may grow at a slower rate, dividends don't seem to be at risk yet.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Kinder Morgan, Inc. Stock Quote
Kinder Morgan, Inc.
$16.76 (-0.95%) $0.16
ONEOK, Inc. Stock Quote
$55.50 (-1.12%) $0.63

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.