Kinder Morgan (KMI 2.09%) and NextEra Energy Partners (NEP 0.98%) both pay attractive dividends -- Kinder Morgan yields 7.4% and NextEra Energy Partners 3.7%. However, they differ considerably in many other aspects, including the main power source of their payouts and their growth profile. Those two factors could significantly affect their ability to generate returns for investors, making one stand out as the better buy.

What they do

Kinder Morgan is one of the largest energy infrastructure companies in North America. It owns or operates more than 83,000 miles of pipelines that transport oil, natural gas, refined petroleum products, and carbon dioxide. It also has one of the largest terminal businesses on the continent, storing and handling petroleum products, chemicals, and other materials. Finally, it produces some oil. 

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

Image source: Getty Images.

Kinder Morgan's assets generate relatively stable earnings backed primarily by fee-based contracts. Take-or-pay arrangements back 68% of its cash flow, meaning there's no volume or commodity-price risk with those earnings. Hedging contracts lock in another 6%, insulating this cash flow from changes in commodity prices. The rest either has some exposure to changes in commodity prices or volumes. However, even with this exposure, the company's earnings are reasonably resilient, which has been evident this year. Despite the upheaval in the energy market, Kinder Morgan only expects its cash flow to be about 10% below its initial budget.

NextEra Energy Partners also owns or operates some natural gas pipelines. However, the bulk of its cash flow -- about 70% -- comes from its renewable energy business. The company currently owns 5,330 megawatts (MW) of wind (4,575 MW) and solar (750 MW) assets around the country.

The company's natural gas assets generate very steady cash flow backed by take-or-pay contracts or long-term leases. Meanwhile, its renewable energy business produces predictable cash flow supported by long-term, fixed-rate power purchase agreements. There isn't much variability in the company's earnings, since the only factor that usually affects its results is wind consistency. It has therefore generated strong results this year despite the economic upheaval caused by COVID-19.

What the future holds for these to energy companies

This year's oil market downturn has done some damage to Kinder Morgan's long-term growth prospects. The company initially expected that it could invest $2 billion to $3 billion per year on expanding its energy infrastructure operations. However, it cut this year's spending level from $2.4 billion to $1.7 billion. It could invest even less in the future, since it only has $2.9 billion of expansion projects currently lined up through 2023.

The company expects to shift gears in the coming years by investing less cash on expansion and returning more to investors. It has already promised another 19% dividend increase once oil market conditions stabilize. However, with dwindling growth prospects, the main driver of future dividend growth will be increasing the dividend payout ratio, which will be up to around 60% after delivering on its planned raise. Its only other source of growth would probably come from acquisitions, assuming it can find deals that meet its high hurdle rate.

NextEra Energy Partners is much more bullish on its future growth prospects. The company currently estimates it has enough power to increase its payout by 12% to 15% per year until 2022 without making any new additions to its portfolio. Powering that plan will be expansions at its natural gas pipelines, wind repowering projects, and a higher dividend payout ratio, which will average 70% this year.

Beyond that, NextEra Energy Partners anticipates that it can maintain that dividend growth rate through 2024 by making additional investments. The main power source will be acquisitions, primarily drop-down deals with its parent, leading electric utility NextEra Energy (NEE 0.46%). That company currently has 19 GW of operating wind and solar energy assets and 13 GW of renewables in its backlog. It also has more natural gas pipelines under development.

While NextEra Energy Partners has no shortage of acquisition opportunities to power future dividend growth, it will need outside funding to make these deals since it has a high dividend payout ratio. There's some concern with this, since it doesn't have an investment-grade credit rating, making it more expensive to borrow money. However, the company has been able to creatively source capital by working with private equity companies in the past, suggesting it could tap those sources to finance deals in the future.

More growth could fuel higher returns

While Kinder Morgan currently offers a much higher-yielding dividend that it can still increase via a higher payout ratio; it's running out of fuel to grow its cash flow. On the other hand, NextEra Energy Partners has lots of power to expand its payout and cash flow. It could generate higher total returns in the coming years, making it the more attractive stock to buy these days.