Fixed-income investments like high-quality bonds can be a great way to generate some supplemental income. They make fixed interest payments on a regular schedule until they mature.
However, bonds aren't the only way to generate extra income. High-qualitydividend stockscan also be great income-producing investments.Kinder Morgan(KMI 0.23%) is an excellent option because it offers investors a bond-like income stream with a couple of additional benefits.
Here's why income-focused investors will want to consider Kinder Morgan.
Built on a rock-solid foundation
Kinder Morgan currently pays a quarterly dividend of $0.2825 per share ($1.13 annualized). At the recent stock price of around $17.25 a share, Kinder Morgan offers a 6.6%dividend yield(one of the highest in theS&P 500). A $1,000 investment into Kinder Morgan would produce about $66 in annual dividend income at that rate. For perspective, a $1,000 investment in a 10-yearU.S. Treasury note would produce about $43 in annual interest income, given its recent yield of 4.3%.
While Kinder Morgan doesn't have the full faith and credit of the U.S. government backing its dividend, the company does have a strong financial foundation supporting its payout. The bedrock is the company's very durable cash flows. Take-or-pay contracts or hedging agreements underpin 67% of its earnings. That means it gets paid regardless of commodity prices and volumes.
Meanwhile, fee-based contracts provide another 26% of its earnings, which means it earns a fixed fee no matter what happens with commodity prices. That leaves only about 7% of its profits exposed to the volatility of commodity prices and volumes.
Meanwhile, Kinder Morgan pays a conservative portion of its stable cash flow in dividends. The company anticipates producing about $4.8 billion, or $2.13 per share, of distributable cash flow this year, which is cash it could pay in dividends. That puts itsdividend payout ratioaround 53%, a very low level for a company that generates so much steady cash flow.
Finally, the pipeline company complements its durable cash flows and low dividend payout ratio with an investment-grade balance sheet. Kinder Morgan'sbond ratingsare in the mid-BBB range, and itsleverage ratioshould end the year around 4.0 times (below its 4.5 times target). The company's strong balance sheet gives it lots of financial flexibility.
Providing something bonds don't offer
While the fixed interest paid by bonds is a big draw, these investments have some drawbacks. Bond investors face reinvestment risk. If interest rates are lower when the bond matures, the investor must accept a lower yield when rolling over their principal. On top of that, inflation will steadily reduce the buying power of fixed-interest payments.
On the other hand, an investment in Kinder Morgan potentially solves both issues. Unlike bond interest payments that end at maturity, Kinder Morgan could continue paying dividends at the same level into perpetuity, at least in theory. While that's not always the case in real life (Kinder Morgan cut its payout by 50% in 2015 to retain additional cash to strengthen its financial profile), dividends don't have a set expiration date.
Further, many companies (Kinder Morgan included) steadily increase their payouts. Kinder Morgan has raised its dividend for the last six consecutive years, including by 2% in 2023. A growing dividend helps offset the impact of inflation (and, in many cases, provides investors with real income growth after inflation).
Kinder Morgan's dividend should keep rising at a modest rate in the future. The company uses a portion of its retained cash flow to make growth-related investments. Kinder Morgan currently expects to invest about $2.1 billion this year on various organic growth projects, including expanding existing natural gas pipelines, building new renewable natural gas production facilities, and constructing a carbon capture and storage project. They're part of a $3 billion backlog of high-return capital projects it currently has under construction.
These projects should help increase the company's cash flow, giving it the fuel to continue growing its payout. Kinder Morgan also has the financial flexibility to make acquisitions as opportunities arise, which could give it more fuel for dividends.
A high-quality income stream
Kinder Morgan potentially offers investors a better income stream than they can get from bonds. It pays a very durable dividend that it should be able to maintain and grow for years to come. Those features make it an excellent stock for income-seeking investors to buy and hold for a potential lifetime of passive cash flow.
Matthew DiLallo has positions in Kinder Morgan. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool has a disclosure policy.
