In this high-interest-rate environment, it may make sense for more risk-averse investors to hedge their investment bets and buy 10-year U.S. Treasury bonds. After all, these safe government debt instruments currently yield 4.3%. The downside to this approach is that returns are substantially limited, and there is no further upside to investment income.
For investors with a higher risk tolerance, blue-chip dividend growth stocks offer a potentially more appealing alternative. Let's look at two proven dividend growers that both yield at least as much as the 10-year T-bill and may be worthy of consideration for your dividend stock portfolio.
Image source: Getty Images.
1. Kinder Morgan: 6.5% dividend yield
Of all the commodities in the world, fossil fuels are taken for granted by people the most. Without even thinking, the world's populace consumes more fossil fuels with each passing year. This is because the myriad uses of coal, natural gas, gasoline, and crude oil have dramatically lifted living standards for some decades now. These commodities are processed for use as inputs in countless products, they help transport these products from point A to point B, and they provide electricity, and help heat (and cool) homes and businesses.
This is what makes Kinder Morgan (KMI -0.64%) and its infrastructure of approximately 82,000 miles of pipelines that store and transport natural gas, crude oil, gasoline, and carbon dioxide so important. The company is predominantly focused on the cleanest fossil fuel, natural gas, deriving 62% of its revenue from the commodity. This explains how the company is responsible for moving a staggering 40% of the U.S.'s natural gas production daily.
As the global economy helps more people to join the ranks of the middle class, demand for natural gas and oil products is expected to rise between now and 2050. This should allow Kinder Morgan to sustain slow and steady growth over the long run. Combined with a dividend obligation that is covered by free cash flow 1.3 times over, the payout is funded well enough to keep growing at a low-single-digit rate annually for the foreseeable future.
Shares of Kinder Morgan also look to be rationally priced: Its price-to-book (P/B) ratio of 1.3 is in line with its 13-year median P/B ratio of 1.3. For a company whose long-term fundamentals arguably remain intact, Kinder Morgan fairly trades at the current $17 share price.
2. American Electric Power: 4.2% dividend yield
Speaking of electricity, American Electric Power (AEP -1.84%) is a well-established electric utility. As of June 30, the company had over 225,000 miles of distribution lines that provided power to 5.6 million regulated customers throughout 11 U.S. states across the South and Midwest.
As part of its commitment to shareholders to generate 6% to 7% annual operating earnings growth, American Electric Power plans to heavily invest in its infrastructure over the next five years. The company anticipates that it will allocate $40 billion to renewables, electricity distribution upgrades, and electricity transmission upgrades between 2023 and 2027. This will help American Electric Power to both support a growing customer base and better serve existing customers.
Along with the issuance of debt and additional shares, the company's targeted dividend payout ratio of 60% to 70% makes its capital spending plan feasible. That is why the utility believes it can deliver dividend growth in line with earnings growth, which would be an excellent mix of starting yield and growth prospects. American Electric Power's P/B ratio of 1.7 is at a five-year low, and moderately below its 13-year median P/B ratio of 1.9. This makes the stock a compelling buy for dividend growth investors at the current $78 share price.
