Dividends seem more popular than ever. Years of low interest rates have left dividend stocks as one of the only places where your money could generate meaningful passive income. While interest rates have risen and savings account yields are creeping higher, high-yield dividend stocks can still be a great way to generate income to pay your living expenses.
But investors want safety, and high yields can sometimes be like a frozen lake, waiting to sink your portfolio when the company's fundamentals get thin enough.
Fortunately, there are still stocks like Kinder Morgan (KMI -0.64%). This midstream energy company plays a crucial role in powering North America, and its 6.4% dividend yield is a prize for long-term investors. Here are three reasons it is a stock that you might be able to hold indefinitely.
1. Kinder Morgan operates core energy infrastructure
Kinder Morgan is a midstream energy company, meaning it participates in the transport and storage of energy commodities in North America. Think of a pipeline company like Kinder Morgan as a tollbooth operator: Companies pay to use its pipelines, much like motorists pay to drive on the highway.
Most of Kinder Morgan's revenue is based on set fees or charges based on the volume of materials running through its pipelines. It's not nearly as sensitive to commodity prices as oil companies that drill for fossil fuels.
Kinder Morgan has thousands of miles of pipelines transporting natural gas, refined products, and carbon dioxide. Carrying natural gas is its largest business, providing about 62% of its revenue. The company transports about 40% of all natural gas produced in the United States.
A lot goes into building new pipelines; they can cost billions, take years to build, and come with lots of red tape if regulated. That's a tough hump for hypothetical newcomers to get over, who probably lack the balance sheets, relationships with regulators, and expertise that incumbent midstream companies have accumulated over time. Pipelines are too hard to make sense for most, which is why the same handful of companies own most of the infrastructure.
2. Demand will increase
The outlook for natural gas in the United States is essential for Kinder Morgan since midstream companies primarily make money based on how much they transport. According to research from analysts at Sanford C. Bernstein, the global demand for liquified natural gas (LNG) could grow 55% from 2022 to 2030. And it's expected that as much as 70% of production needed to meet that demand could come from the United States.
These are estimates, but they make sense. Geopolitical tensions could push the United States and its allies to look for alternative suppliers to Russia. And the declining use of coal in America and Asia could mean increased demand for natural gas, a cleaner energy source.
This all points to increased use of midstream assets, and Kinder Morgan's strong presence, specifically in natural gas, could drive long-term opportunities. For example, industry analysts believe U.S. LNG exports to Mexico could increase from 6 Bcf/d to 7 Bcf/d by 2030. Kinder Morgan has a strong presence in Texas and Louisiana, where much of the export activity is. The company is already expanding the Permian Highway Pipeline, which transports LNG used by Mexico.
3. Solid financials support the payout
Kinder Morgan cut its dividend in 2016 when the energy industry went through a crisis and the company's balance sheet ballooned with debt. That's not something long-term investors probably want to hear, but it looks like management might have learned from the setback.
KMI cash dividend payout ratio; data by YCharts.
Today, the company operates under its long-term target debt-to-EBITDA ratio of 4.5 (the ratio will be 4 at year-end). The dividend is well funded by a payout ratio of roughly 76% of cash profits. In other words, the company isn't living on the edge, a slip away from financial disaster. That doesn't mean the dividend is invincible; investors should monitor the company's financials. But the balance sheet is much healthier now than it used to be.
The energy industry is massive and slow-moving. Fossil fuels won't disappear anytime soon, even if renewable energy keeps growing. Kinder Morgan's position as a crucial midstream operator for American natural gas should protect its 6.4% dividend yield for the foreseeable future.
