Income investors are always looking for stocks that can generate a steady dividend income year after year. Dividend stocks offer a great way of putting your money to work to generate a regular income stream. Before investing, however, you must weigh the risks and rewards associated with any stock.
Here is a great dividend stock that not only offers an appealing yield, but its payouts are also reasonably safe.
Solid dividend yield
The stock that I'm referring to is Kinder Morgan (KMI -0.24%). Kinder Morgan owns or operates roughly 83,000 miles of pipelines in North America. It derives more than 60% of its earnings from natural gas pipelines, 16% from products pipelines, and 13% from storage terminals.
As of Jan. 19, Kinder Morgan stock offered a dividend yield of 6.2%, which was the sixth-highest yield in the S&P 500 stocks.
Data as of Jan. 19, 2022. Image source: Kinder Morgan.
As of this writing, the yield on Kinder Morgan stock has fallen to 5.6%. Still, as the above chart shows, very few S&P 500 stocks offer yields higher than that level.
Lifetime of income
In addition to being high, Kinder Morgan's yield looks sustainable. There are two key factors that support the company's dividend. First, since 2016, Kinder Morgan has been funding its capital expenditures and dividend payments through the cash it generates from operations.
Image source: Kinder Morgan.
As the chart above shows, Kinder Morgan's cash flow from operations (CFFO) has been higher than its capital expenditures (capex) and dividends combined for every year since 2016. In the last six years, the company generated $29 billion of CFFO. It paid a total of $11 billion in dividends.
Kinder Morgan also repaid net $8 billion in debt since 2016. The company used proceeds from asset sales to repay its debt. This approach of using cash from operations to fund dividend payments and capital expenditures, instead of borrowing funds for the same, helped the company grow without hurting its balance sheet strength. Further, selling assets that were not core or most profitable helped Kinder Morgan reduce its debt, without hurting growth much.
This financial discipline bodes well for the sustainability of Kinder Morgan's dividend.
The second key factor that supports Kinder Morgan's dividend growth in the long term is its focus on natural gas.
Based on data from the IEA (2021) World Energy Outlook. Image source: Kinder Morgan.
Based on the International Energy Agency's (IEA's) Stated Policies Scenario (STEPS), the demand for natural gas continues to grow through 2040. Natural gas may account for 24% of the 2040 global energy mix. Coal demand continues to fall during this timeframe, whereas the demand for oil products stabilizes after 2030.
It means Kinder Morgan's assets could find robust demand for decades to come. Additionally, the company is evaluating opportunities for the long term in the clean energy segment, including renewable natural gas, carbon capture, and hydrogen. In short, Kinder Morgan stock can generate passive income for you for decades to come.
