Kinder Morgan (KMI -0.05%) pays a big-time dividend that yields over 5.5%. That makes it attractive to investors seeking an above-average passive income stream.
However, before investors go out and buy shares of Kinder Morgan, they should know the arguments for and against an investment. We asked a couple of our contributors to provide a bull and bear case for the natural gas pipeline giant. Here's what they had to say about Kinder Morgan.
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Gas-powered growth ahead
Matt DiLallo (Bull): I've owned shares of Kinder Morgan for many years. There are two reasons I continue to hold the natural gas pipeline company.
For starters, its high-yield dividend is on rock-solid ground. This year, Kinder Morgan expects to generate enough free cash flow to cover its entire dividend outlay and $1.3 billion of expansion-related spending with $870 million to spare. That gives it extra money to strengthen its already solid balance sheet, repurchase shares, or invest in new expansion-related opportunities as they emerge. In addition to having a conservative dividend payout ratio, -- it projects to be around 55% of its cash flow this year -- Kinder Morgan also has solid balance sheet with a leverage ratio below its target level. That puts its high-yielding dividend on a very sustainable level. As an investor who loves to collect passive income, I know I can count on Kinder Morgan's dividend.
I'm also bullish on Kinder Morgan because of the renewed focus on energy security following Russia's invasion of Ukraine. More countries are now seeking ways to improve their energy security. One of the best solutions is to lock up supplies of liquified natural gas (LNG). That should benefit Kinder Morgan by providing it with opportunities to expand its natural gas infrastructure. The company is currently working toward two potential natural gas pipeline expansion projects and is reviewing a possible expansion of its LNG export facility. Those investments would help grow its cash flow, enabling Kinder Morgan to continue increasing its dividend.
Overall, Kinder Morgan provides investors with a bond-like income stream and equity-like upside potential as it capitalizes on the growing demand for gas. I think those features make it a solid addition to an income-focused portfolio.
There are other, perhaps better, options
Reuben Gregg Brewer (Bear): To be fair, Kinder Morgan is a large and generally well run midstream pipeline company. It would be hard to suggest that owning it is a massive mistake. However, there are other large and generally well-run midstream companies out there. Two that come easily to mind are master limited partnership (MLP) Enterprise Products Partners (EPD -0.41%) and Canadian giant Enbridge (ENB 1.68%). The big differentiator between Kinder Morgan and these two peers is the dividend.
Enterprise Products Partners has increased its distribution annually for 23 years. Enbridge has increased its dividend for 27 consecutive years. Kinder Morgan's streak is only five years, if you include its most recent boost in 2022. Notably, the company cut the dividend in 2016. There's a deeper story here.
In late 2015, management told investors to expect a dividend increase of up to 10% in 2016 just months before announcing that the dividend would, instead, be trimmed by 75%. The cut came amid a difficult time for the midstream sector and was probably the best move for the company, but investors would have every right to have trust issues after that about face. And, more recently, the company promised a 25% dividend increase in 2020, but then it only increased the payout 5%. While 2020 was a tough period for the energy sector as a whole, given the impact of the coronavirus pandemic, that's another example of overpromising and underdelivering. For income investors worried about dividend consistency, Kinder Morgan just doesn't stack up where it counts.
Consistency versus security
Investors considering Kinder Morgan need to determine what matters most to them. If they want a dividend stock that has always delivered on its promises, it might not be the best option. However, it looks like a solid option if they're looking for a sustainable dividend with some upside potential powered by the shift toward energy security.
