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These High-Yield Dividends Aren't Going Away Anytime Soon

By Matthew DiLallo – Dec 27, 2021 at 8:35AM

Key Points

  • Kinder Morgan and Williams operate extensive natural infrastructure.
  • Despite climate change concerns, gas will remain vital to the future.
  • That gives both companies time to transition while they continue paying big-time dividends.

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These companies appear poised to continue generating lots of cash.

Climate change concerns have grown in recent years. That's fueling trillions of dollars of investment into cleaner alternative fuel sources like renewable energy to reduce climate change-causing carbon emissions.

However, despite all the money pouring into renewable these days, it will take years to wean the global economy off its addiction to fossil fuels. That means traditional energy companies have plenty of time to transition their businesses. In the meantime, many are generating gushers of cash flow, which they're using to pay big-time dividends. Two lucrative income streams that aren't likely to go away anytime soon are those paid by Kinder Morgan (KMI 1.54%) and Williams Companies (WMB 2.08%).

A person at a computer with financial charts on a desk overlaid by an upward pointing arrow.

Image source: Getty Images.

A cash flow machine

Natural gas pipeline giant Kinder Morgan currently offers a dividend yield of 7%. That's multiples above the S&P 500's dividend yield, which is near a 20-year low of less than 1.3%. 

Kinder Morgan's high-yield dividend is on as firm a foundation as you'll find. It currently expects to generate $2.07 per share of distributable cash flow in 2022, up 9% from 2021's level, after adjusting for the positive impact from winter storms in Texas last February. That's enough money to cover the company's projected dividend -- which it intends to increase by 3% for 2022 -- by almost 1.9 times. 

Overall, Kinder Morgan expects to generate enough cash in 2022 to cover its entire dividend outlay and $1.3 billion expansion program with about $870 million to spare. The company plans to return up to an additional $750 million to investors through its share repurchase program. Kinder Morgan can return that extra cash to shareholders because of its strong balance sheet. It expects to end next year with a 4.3 leverage ratio, below its 4.5 long-term target. 

Kinder Morgan is also investing money to expand beyond its core natural gas pipeline business. It bought a renewable natural gas producer last year and is making several other investments to increase its capacity to handle and store other alternative fuels. It's also exploring opportunities in carbon capture and storage and green hydrogen. These investments should fuel growth in the years to come. 

A pipeline of steady cash flow

Williams Companies also operates an extensive natural gas infrastructure platform. That business generates lots of cash, making it easy to support its 6.4%-yielding dividend. Williams expects to cover its dividend, which it increased by 2.5% this year, by more than 2 times.

Like Kinder Morgan, Williams is generating enough cash to cover its dividend and expansion-related spending with room to spare. That's providing it with excess cash to shore up its already solid balance sheet and return additional money to shareholders. It expects to end 2021 with a leverage ratio of 4.0, better than its 4.25 guidance. It also launched a $1.5 billion share repurchase program.

Most of Williams' current expansion spending is on high-return natural gas pipeline projects. However, the company is increasingly investing capital in reducing its emissions, including investing in renewable energy projects. It's developing several solar energy projects to self-power some of its key facilities. These projects will reduce emissions and operating costs. 

Williams is also working with European green energy company Orsted on longer-term opportunities. They're exploring large-scale wind energy and other co-development opportunities in Wyoming, where Williams owns lots of land and natural gas infrastructure. Williams is also looking into developing a potential green hydrogen hub in Wyoming. These potential alternative energy investment opportunities could provide Williams with more fuel to support and grow its dividend in the coming years. 

Attractive options for income-seeking investors

Kinder Morgan and Williams Companies generate lots of cash from their legacy natural gas infrastructure businesses. That will not end anytime soon because gas is vital to the economy. Instead, demand should continue rising since it burns cleaner than oil and coal.

That's going to give both companies plenty of time to transition their businesses to support the energy sources of the future. Both have already started to invest in renewables and explore emerging opportunities. In the meantime, they should have no problem paying their high-yield dividends, which will probably continue to grow in the coming years.


Matthew DiLallo owns Kinder Morgan. The Motley Fool owns and recommends Kinder Morgan. The Motley Fool has a disclosure policy.

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