Brookfield Infrastructure Partners and Kinder Morgan operate sizable infrastructure portfolios that generate gobs of reasonably resilient cash flow. That gives them the money to pay attractive dividends (Brookfield yields 4.5% while Kinder Morgan yields 7.3%) and invest in expansion projects to fuel future growth.

While those factors would make either company attractive to most income investors, many likely only want to own one, given their similarities. Here's what dividend seekers should consider when comparing these two options.  

Oil tankers at a storage terminal.

Image source: Getty Images.

Analyzing the dividend's sustainability

When investors buy a stock for its dividend, the payout must be on a sustainable foundation. With that in mind, here's a look at the current financial foundations of Brookfield Infrastructure and Kinder Morgan:

Company

Credit Rating

% of Cash Flow Fee-Based or Regulated

2020 Dividend Payout Ratio

Brookfield Infrastructure Partners (NYSE:BIP)(NYSE:BIPC)

BBB+

95%

63%

Kinder Morgan (NYSE:KMI)

BBB/Baa2

92%

52%

Data source: Brookfield Infrastructure and Kinder Morgan.

As that table shows, both companies have solid investment-grade credit ratings, generate reasonably stable cash flow, and have conservative dividend payout ratios. The two companies also currently have lots of liquidity -- cash and borrowing capacity -- which gives them even more financial flexibility. Brookfield ended the first quarter with more than $3.3 billion of liquidity, while Kinder Morgan recently reported having $526 million of cash and $3.9 billion available on its credit facility. Because of that, both dividends are on solid ground. 

However, one factor worth pointing out is that there is some concern with Kinder Morgan's financials due to its focus on the volatile oil and gas market. The company expects its 2020 earnings to be about 10% below its initial budget. Because of that, its leverage ratio will fall from its original projection of 4.3 times debt to EBITDA to 4.7 times, which is above its 4.5 times target. That rising leverage forced the company to take some steps to preserve cash, including capping this year's dividend increase to 5% instead of the initially promised 25% boost.

What the future holds for these dividends

While Kinder Morgan didn't fully deliver on its long-promised dividend level this year, it remains committed to eventually hitting that target. It currently plans to reevaluate the payout in early 2021, when it could make the final push.

What's not clear is what the future holds for Kinder Morgan's dividend beyond next year. This year's plunge in oil and gas prices will likely stunt production growth in North America, lessening the need for new energy-related infrastructure. Because of that, Kinder Morgan might not find enough expansion projects to keep growing. While the company expects to invest roughly $1.75 billion on growth projects this year, that's well below the $2.4 billion it initially planned and its $2 billion to $3 billion annual target range. With only about $2.9 billion of remaining capital projects in its backlog, the company is running low on fuel to grow its earnings and dividend.

Brookfield Infrastructure operates a much more diversified infrastructure portfolio -- including utilities and energy, transportation, and data infrastructure -- which has largely insulated it from this year's energy downturn. Because of that, the company was able to increase its dividend by 7%, right in the middle of its long-term target range to deliver 5% to 9% annual growth. Powering that dividend growth projection is a trio of organic growth drivers (inflation-linked escalators on its contracts, volume growth, and expansion projects), which should expand its cash flow by 6% to 9% per year. In addition to that, Brookfield uses its strong balance sheet and asset sales to make accretive acquisitions. It has closed several deals over the past couple of years, which, when combined with organic growth, have boosted its annualized earnings run rate by 25% over the past two years. Although one recent acquisition fell through, it has several more in various stages. These deals could give Brookfield the fuel to grow its payout at or above the high end of its target range in the coming years. 

More power could fuel higher returns

Kinder Morgan currently offers dividend investors an enticing yield that could be even higher next year if it delivers the final dose of its promised dividend increases. However, it's not clear how much fuel it will have to continue growing the payout in the future. Because of that, its stock could underperform Brookfield Infrastructure, which has plenty of power to keep pushing its dividend higher. That potential for a greater total return makes Brookfield's stock look like a more attractive buy right now.