There's never been a bad time for safe dividend investments. Income-generating securities give investors returns without having to sell stock, which goes hand-in-hand with the concept of long-term investing. The energy sector is full of tempting high-yielding dividend stocks, many of which are anything but safe.

Kinder Morgan (NYSE:KMI) has spent the last five years turning its business around, transforming itself into a safe dividend stock that currently yields over 7%. Here's a look at why Kinder Morgan is a different company than it used to be, and why it could be worth investing in now. 

A businessman holds an umbrella over a scale, weighing a bag of money against risk.

Image source: Getty Images.

The crash

Between 2010 and 2014, the amount of long-term debt belonging to the 10 largest publicly traded North American midstream companies by market capitalization doubled. In a 2018 report, the FDIC found that a high sustained oil price drove oil and gas lending commitments up by a whopping 27% from 2012 to 2014. Community banks were lending to rural markets suddenly flush with jobs and money thanks to oil. The FDIC also found that financial institutions in oil-related geographies enjoyed far higher deposits and growth than those in other geographies. In sum, high oil prices and technological developments like horizontal drilling and hydraulic fracturing made once uneconomic reserves profitable, which created wealth and piqued interest from financial institutions. The oil price crash of 2014 and 2015 changed things. It exposed the dangers of carefree lending in the oil and gas industry when several companies hemorrhaged cash to make ends meet. 

Jaded from broken promises and unjustifiable ambition, Wall Street has pressured oil and gas companies to convert from growth as a means to drive efficiency, to becoming free cash flow (FCF) positive at all costs. Becoming consistently FCF positive ensures that the business is profitable, dividends are likely to be paid, a low level of spending can be sustained, and interest is paid in full. Despite achieving investment-grade credit ratings, interest rates on long-term debt remain relatively high for the large midstream players. Kinder Morgan, for example, has a 5.25% average interest rate on its loans, its highest in 10 years. This is despite the fact that the interest rate on a BBB U.S. corporate bond is at a 10-year low of 2.1%.

The transformation

Kinder Morgan was like many oil and gas companies in late 2015. Focused on growth, Kinder Morgan's long term debt nearly tripled between 2010 and 2015. It went from paying around $600 million in interest in 2010 to over $2 billion in 2015. Aggressive use of debt led Kinder Morgan to cut its dividend by 75% in late 2015. Since then Kinder Morgan has sculpted itself according to a new risk-averse model -- converting from an ambitious infrastructure company to a stodgy cash cow. The result has been transformative.

KMI Free Cash Flow (Annual) Chart

KMI free cash flow (annual) data by YCharts.

Kinder Morgan has consistently supported its dividend with cash. Its reliable take-or-pay and fee-based sources of FCF supported by long-term contracts mostly safeguarded this year's earnings. The company is on track to record a full-year 9% decrease in EBITDA and distributable cash flow (DCF) of $1.99 per share, 11% below its initial budget. This is quite an accomplishment when you consider the carnage in other areas of the energy sector.

Since the dividend cut, Kinder Morgan has increased its annualized FCF by 75%, decreased capital expenditures by 42%, and raised its quarterly dividend from $0.125 to the current $0.2625. Throughout the pandemic, management has repeatedly emphasized its priorities. Executive chairman Rich Kinder summed it up well during the third-quarter conference call: "We are confident that KMI will continue to generate strong cash well in excess of our expansion capex needs, and the funding of our current dividend that will allow us to maintain a strong balance sheet and return significant additional cash to our shareholders through increased dividends and our share repurchases."

Overlooked and underappreciated

Kinder Morgan has slowed its growth to fit Wall Street's new paradigm for the risk-averse, FCF-positive energy stock. But it has heavily underperformed the market over the past five years, producing a total return of just 16% compared to the market's 98%. The underperformance is probably due to a number of factors.

Kinder Morgan let down its investors for years, so it still could be in "prove it" mode. Despite its contracts and predictable FCF, the company is susceptible to long-term shifts in the energy mix, namely from natural gas to renewables. Another factor is that Wall Street has been sour on oil and gas since the 2014-2015 downturn, and more so this year as several oil and gas companies went bankrupt or are facing bankruptcy.

Your portfolio's next role player

Regardless of how the market is valuing Kinder Morgan, the company appears to be an attractive and reliable income stock. It has a dividend yield of 7.1%, which is what many investors hope to make from the stock market in a full year. Kinder Morgan isn't likely to crush the market or produce staggering returns. It's not the first-round draft pick that could be a boom or bust. It's unlikely to carry your portfolio on its own. But it's an ideal role player at a fair value, which could be worthwhile for retirees and dividend lovers looking for a steady source of cash.

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.