ONEOK (NYSE:OKE) currently offers income investors an enticing 8.3% dividend yield, which is quite a bit above Kinder Morgan's (NYSE:KMI) 6.3% payout. However, that higher yield comes with a much higher risk profile. That means dividend investors are better off forgetting about ONEOK right now and should instead consider buying Kinder Morgan for its payout.

ONEOK's numbers tell a worrisome story

ONEOK initially expected 2020 would be a monster year. However, with all the volatility in the oil market, the company had to water down its outlook. Now it expects to generate only between $1.785 billion and $2.185 billion in distributable cash flow this year. That's well below its initial outlook that it would produce between $2.245 billion and $2.505 billion in cash, which would have been 18% ahead of 2019's level.

$100 bills with the word dividend on a piece of paper.

Image source: Getty Images.

The significant reduction in ONEOK's outlook is worrisome, given its funding needs and the current state of its balance sheet. For example, the dividend consumes around $385 million of cash per quarter, suggesting the company would pay out about $1.54 billion this year at the current rate. That would leave it with only between $245 million and $645 million of retained cash for expansion projects. However, with the company on track to spend $1.4 billion to $1.8 billion this year, even after trimming its budget by $900 million, it has a large funding gap.

On a positive note, ONEOK was able to use its investment-grade balance sheet to raise more debt, issuing $1.75 billion in bonds in March and another $1.5 billion in May. However, it paid a much higher price for that second tranche of new debt because its leverage ratio is starting to become a concern. The ratio rose to 4.86 at the end of the first quarter, well above its sub-4.0 target. That number is likely to continue growing as ONEOK outspends cash flow to fund its dividend and capital expenses.

The concern is that if market conditions deteriorate again, ONEOK might need to reduce its dividend and use that money to finance capital expense as well as pay down debt.

Kinder Morgan's numbers point to sustainability

Kinder Morgan has also experienced some impact from this year's downturn in the oil market. The company initially anticipated that it would generate $5.1 billion in cash. It also expected to increase its dividend by 25% and maintain a leverage ratio of 4.3, which would have been comfortably below its 4.5 target. 

However, because of the turbulent market conditions, Kinder Morgan now expects to produce only $4.6 billion in cash. Because it also sees its leverage ratio rising to 4.6 this year, Kinder Morgan increased its dividend by only 5%.

On a more positive note, that payout is on a much firmer foundation than ONEOK's. That's because Kinder Morgan will only pay out $2.39 billion to cover its dividend, leaving it with $2.1 billion in excess cash. With only $1.7 billion of capital projects on the docket, Kinder Morgan will generate free cash after funding the dividend and capital expenses, which provides it with additional financial flexibility. 

Meanwhile, Kinder Morgan remains committed to eventually providing investors with a full 25% dividend increase. If market conditions continue improving, Kinder Morgan could approve an additional raise before the end of the year.

More sustainable with visible upside

ONEOK currently offers dividend investors a higher yield. However, that payout is on shaky ground given ONEOK's financial situation.

On the other hand, Kinder Morgan's dividend is on solid ground since it's on track to generate enough cash to cover its payout and capital expenses with room to spare, so it should be able to provide its investors with another raise. That combination of sustainability and upside make Kinder Morgan a much better option for income investor these days.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.