The holy grail of dividend investing is to find an excellent, reliable business that generates stable cash flows and earnings to support a growing dividend with a high yield.

And while Kinder Morgan (KMI 0.51%) may not be a household name, it is an industry leader whose current position and future prospects make it ideally suited to return value to shareholders through its dividend.

Here's why Kinder Morgan and its 6.7% dividend yield are an opportunity worth considering now.

Silhouette of a pipeline at sunset.

Image source: Getty Images.

A primer on Kinder Morgan

Kinder Morgan is mainly in the business of transporting and storing natural gas, natural gas liquids, crude oil, carbon dioxide, and other fuels. The company operates one of the largest pipeline networks in North America. The majority of its business is involved in the transport of natural gas away from production centers.

Kinder Morgan's objective is to invest in assets with a long life spans that can produce steady cash flows over time. To reduce the volatility of its business, Kinder Morgan contracts its services through take-or-pay and fixed-fee contracts. This structure helps limit the impact of unexpected oil and gas price swings, which caps upside but also reduces downside. For example, Kinder Morgan's business only took a minor hit during the 2020 oil and gas crash, and hasn't benefited as much from higher oil and gas prices during the recent boom. This relationship also means that Kinder Morgan stock is likely to outperform the broader energy sector during a downturn, and underperform it doing a boom. But again, the most attractive aspect of Kinder Morgan isn't the potential capital gains, but rather the high dividend yield (more on that later).

Since its existing infrastructure is largely dependent on demand for oil and gas, the biggest threat to Kinder Morgan would be a rapid shift away from fossil fuels. However, recent events (namely the removal of the majority of Russian oil and gas supply from the market) have left room for the U.S. to boost production to make up for the shortfall. If Western sanctions on Russian oil and gas supply persist, it will be easier to justify new production investments and takeaway capacity. Despite this tailwind, oil and natural gas demand could still fall over the long-term as oil's role in the transportation energy mix losses ground and natural gas-powered power plants, industrial, and commercial applications are replaced with lower-emission sources.

Alternative investments

To reduce the existential threat of Kinder Morgan's infrastructure being worth substantially less in the future than it is today, the company is investing in low-carbon solutions, as well as making strategic acquisitions and sales.

Over the last two years, the company purchased Stagecoach Gas Services (Stagecoach) for $1.225 billion (10 times its 2020 EBITDA), Kinetrex Energy (Kinetrex) for $310 million (six times its estimated 2023 EBITDA), and North American Natural Resources (NANR) for $175 million (six times expected 2024 EBITDA), and sold half of its stake in the Elba Liquefaction Company for $565 million at a valuation of 13 times 2022 estimated EBITDA. The Stagecoach acquisition bolsters Kinder Morgan's asset portfolio in the east and Northeast, and Kinetrex gives it exposure to renewable natural gas (RNG) and liquefied natural gas (LNG) assets. NANR is also an investment in RNG. The Elba sale was also a premium valuation for an LNG project.

In sum, Kinder Morgan is positioned to generate reliable earnings from traditional oil and gas projects, as well as projects centered around alternative fuels. Investments in RNG, LNG, hydrogen, renewable diesel, and other alternative fuels will require new infrastructure. Kinder Morgan is well positioned to leverage decades of experience to integrate these acquisitions into its portfolio and make reliable returns from new projects.

Improving the balance sheet

Since the oil and gas crash of 2014 and 2015, Kinder Morgan has taken a disciplined approach to capital investment. It has cut spending while reducing debt and improving its balance sheet.

KMI Debt To Capital (Quarterly) Chart

KMI Debt To Capital (Quarterly) data by YCharts

In the above chart, you can see that the company's debt to capital, financial debt to equity, and net long-term debt are all near their 10-year lows, while capital expenditures have been cut in half over the past five years and are also near a 10-year low.

Kinder Morgan could return to growth after its recent acquisitions. But it will do so in a conservative way that focuses on maintaining a strong balance sheet and ensuring that it supports its growing dividend with free cash flow, not debt.

A reliable business with a growing yield

Kinder Morgan is well positioned to benefit from the energy transition, as well as the growing demand for U.S. oil and gas. Given the supply demand imbalance and the need for energy in growing economies, we could see growth in fossil fuels and renewables as the U.S. expands its role as a global energy leader.

Kinder Morgan fills an excellent support role in the U.S. energy sector, and its business model is ideally suited for investors that put a premium on passive income and stability. Given the strength of its balance sheet, its existing assets, and its new investments, Kinder Morgan's dividend should continue to see gradual growth in the years to come.

Kinder Morgan stock has a dividend yield of 6.7% and is only up 5% year-to-date, underperforming the broader energy sector. For investors who believe in the sustained relevance of oil and gas, as well as the need for investments in lower-carbon infrastructure, Kinder Morgan stands out as an excellent high-yield dividend stock to buy in October and hold for decades.