The energy sector has a spotty track record when it comes to dividends. While many companies in the industry pay above-average yields, they aren't always sustainable. That has been the case with both Kinder Morgan (NYSE:KMI) and Clearway Energy (NYSE:CWEN)(NYSE:CWEN.A) as they each significantly reduced their payouts at one point in the past because of some financial issues.

However, both companies have since started increasing their dividends in recent years, making them more attractive options for dividend seekers. Here's a look at which of these two stand out as the better buy these days.

Oil pumps, a natural gas well, and solar panels with the sun setting in the background.

Image source: Getty Images.

Doing some financial analysis

The first step an income seeker should take when considering two relatively similar income options is to analyze their financial profiles. Here's how these two energy companies stack up against each other:

Company

Dividend Yield

Credit Rating

% of Cash Flow Fee-Based or Regulated

Dividend Payout Ratio

Debt-to-Adjusted EBITDA

Kinder Morgan

6.8%

BBB/Baa2

92%

52%

4.6 times

Clearway Energy

3.4%

Ba2/BB

100%

54%

6.3 times

Data source: Kinder Morgan and Clearway Energy. 

As shown in that table, Clearway Energy and Kinder Morgan generate stable cash flow and distribute slightly more than half of it via dividends. Where they differ is in their credit profiles. Kinder Morgan has a solid investment-grade credit rating backed by a leverage ratio that's slightly above its 4.5 target. Meanwhile, Clearway Energy has junk-rated credit. That's due to a relatively elevated leverage ratio and high exposure to the California electricity market -- where it gets 70% of its cash flow -- and bankrupt electric utility PG&E (NYSE:PCG), which supplies about 22% of its cash flow. Clearway's lower credit rating affects its ability to borrow money as well as its interest rate, diminishing its financial flexibility.  

Comparing their growth profiles

Another major difference between these two energy companies is their strategic focus. Kinder Morgan primarily builds and operates natural gas pipelines while Clearway mainly acquires and operates renewable energy generating facilities, leaving them with quite distinct growth profiles.

Kinder Morgan initially expected that its cash flow would rise modestly this year, fueled by recently completed expansions projects, partially offset by asset sales. However, because of all the volatility in oil prices, its cash flow is on track to decline by about 10% this year. While an eventual rebound in commodity prices and the upcoming completion of its current $3.3 billion expansion project backlog should boost its cash flow, Kinder Morgan has reached a slow-growth stage. On a more positive note, with dwindling growth prospects and a low dividend payout ratio, the company expects to increase its dividend by about 19% to achieve its targeted level as oil market conditions improve.

Clearway Energy, on the other hand, is much earlier in its growth stage. This year, the company's cash flow is on track to rise more than 20%, fueled by recent acquisitions and investments. Meanwhile, it recently secured three wind farm acquisitions, which will help power an additional 10% cash flow increase once it completes those deals by early next year. Finally, the company has strategic relationships with a renewable energy project developer and a leading private equity fund, which should provide it with additional acquisition and investment opportunities in the coming years. As long as Clearway can access financing, there should be no shortage of growth opportunities to power future dividend increases.

On top of that, PG&E is nearing the end of its bankruptcy proceeding. Once it emerges, Clearway's lenders will lift the restrictions on the cash PG&E's contracts generate, enabling the company to normalize its dividend.  

A look at valuation

A final aspect that income investors should consider when examining two dividend options is their respective valuations. Here's how these two energy company's compare:

Company

Recent Price

2020 Cash Flow Per Share (Estimate)

Price-to-Cash Flow

Kinder Morgan

$15

$2.02

7.6 

Clearway Energy

$25

$1.56

15.8 

Data sources: Google Finance, company investor presentations, and author's calculation. Share price data as of June 22, 2020.

As that table shows, Kinder Morgan currently trades at about half the valuation of Clearway Energy. On one hand, Clearway should fetch a premium valuation since its earnings are growing fast this year, while Kinder Morgan's are taking a step back because of the impact of the oil market downturn. However, Clearway seems to be somewhat expensive, given its risk profile, which includes its outsized exposure to California and PG&E and its junk-rated credit.

Growth vs. value and yield

Clearway Energy is much earlier in its growth stage, making it an appealing option for investors seeking a potentially fast-growing income stream. However, Kinder Morgan offers dividend investors a much higher current yield, mainly because of its lower valuation. Furthermore, that payout is on a firmer foundation thanks to its stronger credit profile. Because of those factors, Kinder Morgan stands out as the better buy these days since it offers an attractive total return profile for less risk.