After rallying more than 27% in 2021, the dividend yield on the S&P 500 is near a 20-year low of 1.24%. That's an anemic income yield for investors seeking to generate passive income.
However, while many stocks aren't offering enticing dividends these days, there's one sector where income investors can find their fill of attractive opportunities: Energy stocks. Several high-quality energy companies are currently offering yields above 6%, including Kinder Morgan (KMI 3.60%) and Enbridge (ENB 2.77%). Here's why that high-yield dividend isn't the only factor that makes them look like good buys for 2022 and beyond.
Image source: Getty Images.
Generating gobs of free cash flow
Natural gas pipeline giant Kinder Morgan currently yields 6.8%. While a payout that high might seem suspect in today's low-yield environment, that's not the case with Kinder Morgan's dividend.
The company recently released its 2022 financial expectations. It anticipates generating $2.09 per share of distributable cash flow. That's about 9% above 2021's total, after adjusting for the positive impact of winter storms in Texas last February. Its current dividend payment is $0.27 per share a quarter ($1.08 per share annualized), giving it a conservative 52% dividend payout ratio.
Overall, Kinder Morgan estimates that it will generate enough cash in 2022 to cover its dividend -- which it intends to increase by about 3% in 2022 -- and its entire $1.3 billion expansion program with $870 million to spare. Kinder Morgan can use that excess cash to strengthen its already solid balance sheet -- it expects to end 2022 with a 4.3 times leverage ratio, below its 4.5 times target -- repurchase shares, or make additional growth-focused investments. The company said it could opportunistically repurchase up to $750 million of stock in 2022.
It's also worth noting that Kinder Morgan has started shifting its investment toward supporting the fuels of the future. It bought renewable natural gas (RNG) developer Kinetrex Energy for $310 million last year and planned to invest $146 million to build three new RNG facilities. It's also investing in major renewable fuels logistics projects and exploring other lower-carbon investment opportunities, including green hydrogen and carbon capture and storage. These investments should provide Kinder Morgan with the fuel to continue growing its dividend beyond 2022.
Plenty of fuel to continue growing
Canadian energy infrastructure giant Enbridge currently offers a 7% dividend yield. Like Kinder Morgan, that payout is on a firm foundation. Enbridge expects to generate 4.70 to 5.00 Canadian dollars ($3.72-$3.95) of distributable cash flow per share in 2021. With its current dividend at an annualized rate of CA$3.34 per share ($2.64), it has a conservative payout ratio of 69%.
Enbridge expects its cash flow per share to rise to a range of CA$5.20 to CA$5.50 ($4.11 to $4.35) in 2022, or by about 10%, fueled by the recent completion of several expansion projects. It accordingly plans to increase its dividend by another 3% this year, giving it an even more conservative dividend payout ratio. That will mark its 27th straight year of increasing the dividend.
The company estimates that it has CA$5 billion to CA$6 billion ($4 billion-$4.75 billion) of annual investment capacity while maintaining its top-tier balance sheet. It can use those funds on expansion projects, acquisitions, or share repurchases. This investment level should support 5% to 7% annual cash flow per share growth. It's worth pointing out that Enbridge is steadily increasing the amount of capital it spends on lower-carbon investment opportunities, including offshore wind farms in Europe and green hydrogen projects. So the company should have plenty of fuel to continue increasing its dividend in the future.
Great options for dividend-seeking investors this year
Kinder Morgan and Enbridge both offer ultra-high-yield dividends. However, unlike some big-time payouts, these are lower-risk options, given their strong financial profiles. Add that to their visible growth prospects, increasingly powered by cleaner energy sources, and they're great dividend stocks to buy for 2022 and beyond.
