When folks think of high-yield dividend stocks, they might picture risky companies that pay large dividends but operate shaky underlying businesses. However, some stable companies also have generous payouts for investors. A prime example is Kinder Morgan (KMI 0.55%), which has a dividend yield of 6.7% and is one of the largest energy infrastructure companies in the U.S.
Many investors are seeking security and reliable income in their portfolios given the market volatility that marked the beginning of 2022. Here's why Kinder Morgan is the ideal high-yield dividend stock for the second half of 2022 and beyond.
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How Kinder Morgan's stock reacts under different conditions
The 2014 and 2015 oil and gas crash took a sledgehammer to Kinder Morgan's bottom line and forced the company to cut its dividend by 75% to protect its balance sheet. In the years that followed, Kinder Morgan underwent a restructuring and a strategic shift away from high growth toward reliable projects that generate predictable cash flow that can support dividends, buybacks, and strategic acquisitions. That strategy positioned Kinder Morgan particularly well for the oil and gas downturn of 2020, during which the company suffered minor hits to its cash flow and bottom line.
However, Kinder Morgan's stodgy position also means it isn't going to rake in outsized returns during times of high oil and gas prices either. In sum, Kinder Morgan will likely underperform the broader energy sector during expansion times but outperform it during downturns.
NYSE: KMI
Key Data Points
Controlled growth
One of Kinder Morgan's main sources of income is its natural gas pipelines. The newer projects connect the natural gas fields of west Texas and east New Mexico, known as the Permian Basin, to the refineries and export terminals along the Texas portion of the U.S. Gulf Coast. In late June, Kinder Morgan and its partners announced the expansion of a key pipeline, which will increase takeaway capacity from the Permian -- which effectively gives the green light for producers to ramp up production.
Liquefied natural gas (LNG) offers one of the greatest growth drivers for U.S. natural gas production. Instead of relying on domestic demand to grow, producers can now cool and condense natural gas and then ship it to energy-dependent buyers overseas. South Korea, Japan, and China have been huge importers of LNG for years. But now, Europe is quickly approving LNG import terminals as a means to wean itself off of Russian supply.
By connecting production to the refineries and LNG liquefaction terminals, Kinder Morgan plays an integral role in the growth of U.S. LNG exports. Once its pipelines are built, it contracts them under long-term take-or-pay or fixed-fee contracts that ensure it has customers no matter the market cycle.
A dividend that is built to last
Despite the potential for additional U.S. LNG exports and the need for more storage and pipelines, Kinder Morgan is unlikely to resume fast growth anytime soon. And for investors who are optimistic about sustained higher oil and gas prices, it might be better to go with an integrated major like Chevron or a well-run exploration and production company like ConocoPhillips.
But for folks looking for a reliable source of passive income, Kinder Morgan stands out as one of the best companies around. Its cash-cow predictable business ensures it can support its dividend and growth plans with cash, not debt. Furthermore, its balance sheet is in its best shape since the 2014 and 2015 oil and gas downturn. Add it all up, and Kinder Morgan stock provides a low-risk way to earn a 6.7% yield.
