Kinder Morgan (KMI +0.07%) pays one of the 10 highest-yielding dividends in the S&P 500 index at 6.4%. That's several times above that index's 1.5% average. While the company's cheap valuation is a big driver of its higher yield, Kinder Morgan has also increased its payout in each of the last six years.
The company's big-time payout should continue rising in the future. Fueling that belief is its ability to continue securing high-return expansion projects to grow its cash flow. It recently added more fuel to its dividend growth engine and has more potential fuel sources in the pipeline.
NYSE: KMI
Key Data Points
Replenishing the backlog
Kinder Morgan entered the second quarter with about $3.8 billion of capital projects in its backlog. It ended that period with roughly the same amount. However, there was a lot of movement in its backlog during the quarter.
Kinder Morgan placed $450 million of capital projects into service during the quarter. One of the notable projects it completed was the first of its renewable natural gas production facilities from its 2021 acquisition of Kinetrex. That project took a little longer to complete and cost a bit more money than expected. However, CEO Steve Kean noted on the second-quarter conference call that "we expect the whole portfolio of Kinetrex projects to yield a very attractive return on our overall investment, even with the delays we've experienced." Kinder Morgan also finished its northern and southern renewable diesel hubs in California and a major renewable feedstock storage and logistics hub in Louisiana. These high-return projects will supply the company with incremental cash flow, giving it more money to support its dividend.
While $450 million of recently completed projects came out of the backlog during the quarter, the company didn't waste any time refilling its growth engine. Kean stated on the call that the company was successful in "adding roughly $500 million of new projects to the backlog during the quarter." The biggest is a $251 million project to expand its Eagle Ford natural gas transportation system, which should enter service in the fourth quarter of this year. Kinder Morgan also approved a project to expand its natural gas storage capacity along the Texas Gulf Coast that should be in service next year. Meanwhile, it spent $15 million to acquire an adjacent oil field in the Permian Basin. It will begin an enhanced oil recovery project at the field next year to start injecting carbon dioxide to boost its output and cash flow. These high-return projects will help grow its cash flow in the coming quarters, giving it more fuel for paying dividends.
More projects further down the pipeline
Kinder Morgan continues to pursue a variety of other expansion opportunities that could fuel future growth. On the second-quarter conference call, management noted that it had restarted talks with potential customers about expanding its Gulf Coast Express (GCX) pipeline. The company is starting to see renewed interest in the project after NextDecade (NEXT 0.86%) made a final investment decision to start construction on its Rio Grande LNG project. Rio Grande LNG will drive more natural gas demand in the Corpus Christi area, which could fuel enough customer support to expand the GCX pipeline.
That's one of several potential natural gas pipeline expansion opportunities it sees ahead. Co-founder Richard Kinder pointed out on the call that U.S. natural gas demand will grow by 20% over the next five years. Most of that growth will come from LNG and Mexico exports, benefiting its Gulf Coast assets. Kinder commented on the call, "We believe that growth in demand, combined with the strategic location of our network, will drive expansion and extension opportunities for our network and significant bottom-line growth for years to come."
Meanwhile, the company continues to pursue other lower-carbon energy opportunities. Kinder Morgan approved its first carbon capture and storage (CCS) project in January. It's working on several other potential CCS opportunities to leverage its existing infrastructure and carbon dioxide expertise. In addition to CCS, Kinder Morgan is pursuing opportunities to capitalize on the growing demand for renewable fuels.
Lots of fuel to continue growing
Kinder Morgan continues to secure additional high-return expansion projects to replenish its backlog. These projects will supply incremental cash flow to support its growing dividend. With more growth coming down the pipeline, Kinder Morgan remains an excellent option for those seeking an attractive and rising passive income stream.
