The yield of the 10-year U.S. Treasury has fallen off a cliff in recent months. After reaching a high of 5% on Oct. 19, the 10-year yield is now down to 3.9% as investors anticipate that the Federal Reserve will cut benchmark interest rates in 2024.
With a yield of 6.4% at its current share price, Kinder Morgan (KMI -0.64%) has a far higher yield than the risk-free rate. And there are reasons to believe the company will be able to keep delivering its payouts next year and beyond.
Here's why Kinder Morgan is a dividend stock worth buying in 2024.
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A clear path forward
Earlier this month, Kinder Morgan made a special announcement detailing its 2024 financial expectations. It's unusual for companies to issue next year's full-year guidance before this year is even over. But Kinder Morgan can do it because its business model is fairly predictable.
Unlike exploration and production companies, whose financial performances can swing wildly based on the price of oil and natural gas, Kinder Morgan is an energy transportation and storage company with take-or-pay and fixed-fee contracts that drastically reduce the impact of commodity prices on its results. Longer term, the value of Kinder Morgan's infrastructure assets -- and its operations in general -- do depend on demand for oil and natural gas. But in the short term, the company is well insulated from many risks.
For 2024, Kinder Morgan is forecasting that it will pay a dividend of $1.15 per share while collecting $1.21 in earnings per share and $8 billion in adjusted EBITDA. It also expects to have a net-debt-to-adjusted-EBITDA ratio of 3.8, which is far below its long-term target of 4.5. If the guidance proves correct, Kinder Morgan will pay its highest dividend in eight years, post its highest earnings in a decade, and have what is arguably its best balance sheet ever.
KMI EPS Diluted (TTM) data by YCharts.
Kinder Morgan cut its dividend in late 2015. At the time, the oil and natural gas industry was undergoing a brutal downturn. Kinder Morgan was levered up with debt, but it had previously been making a ton of money. The downturn changed all that, and management was forced to slash the dividend and focus on building a more sustainable foundation with a better balance sheet. The payout cut hurt at the time, but it was the right long-term move. Kinder Morgan is in far better shape today than it was even at the height of the early 2010s boom.
Limited growth options
Kinder Morgan is an ideal dividend stock because it is in the company's best interest to grow slowly and return capital to shareholders instead of over-expanding the business. A big reason for that is the state of the U.S. midstream industry.
The midstream industry has limited paths to grow because no company wants to build what turns out to be an underutilized pipeline or other asset that is expensive and won't provide a good return on investment. One way the industry is finding value is through consolidation or acquisitions.
2023 saw a lot of consolidation across the midstream industry. Oneok merged with Magellan Midstream Partners in a deal valued at $18.8 billion. Enbridge spent $14 billion to buy natural gas utilities from Dominion Energy. And there were a lot of smaller deals as well.
Kinder Morgan has made several relatively small acquisitions over the last three years. The company sees such acquisitions as good ways to generate value without the risks of investing in new infrastructure that may take time to show a return.
Kinder Morgan is the perfect dividend stock because its strategy is fairly straightforward and easy to understand. The company can slowly grow cash flows through responsible organic growth and acquisitions. It can then use those higher cash flows to support dividend growth. And it can do all of this while maintaining a healthy balance sheet.
Buy Kinder Morgan for passive income
The company's slow and steady approach probably drives growth investors crazy. Kinder Morgan may be a boring business. But it's the exact kind of company that passive income investors look for.
With less leverage, a reliable and growing dividend with a high yield, and a forward-price-to-earnings ratio of just 14.6 based on $1.21 in 2024 estimated earnings, Kinder Morgan stands out as an inexpensive and reliable dividend-paying value stock to buy now.
