A high dividend yield can sometimes be a sign of a higher risk profile. Oftentimes, high-yield dividend stocks have weaker financial profiles, which puts their payouts at risk of a reduction if the company experiences a financial setback.
However, that’s not always the case. That’s clear when considering Kinder Morgan‘s (KMI -0.04%) high-yielding dividend. The natural gas pipeline giant backs its 4.3%-yielding payout with a rock-solid financial profile. Because of that, it’s an excellent option for those seeking a safe and secure passive income stream.
A financial fortress
Kinder Morgan owns and operates an irreplaceable portfolio of energy infrastructure assets, like pipelines, processing plants, and storage terminals. Most of its assets produce very stable and predictable earnings. About 64% of its cash flow comes from take-or-pay agreements, meaning Kinder Morgan gets paid a fee regardless of whether the customer utilizes the capacity.
Meanwhile, hedging contracts that lock in commodity prices underpin another 5% of its cash flow. That’s 71% of its earnings that the company can bank on each year even if market conditions deteriorate.
Another 26% of its earnings are from fee-based contracts. It gets paid a fixed fee on the volumes that flow through its midstream network. These volumes are highly predictable, with over 40% tied to very stable refined-product cash flows. The remaining 5% of its earnings are unhedged, meaning they have volume and price exposure.
The company’s financial arrangements give it a lot of visibility into its cash flow. It expects to generate $5.9 billion in cash flow from operations this year, a $300 million increase from last year. That’s enough money to cover its capital expenditures ($3.1 billion) and expected dividend payments ($2.6 billion, or 2% higher than last year) with room to spare (over $150 million in excess free cash flow).
Kinder Morgan also has a very strong investment-grade-rated balance sheet. The pipeline giant expects to end this year with a 3.8 times leverage ratio, down from 4.0 times at the end of 2024.
However, that doesn’t include the impact of its planned purchase of a natural gas gathering and processing system in North Dakota. The company expects to close the accretive $640 million deal in the first quarter. That transaction will positively impact its cash flow while having a slightly negative effect on its leverage ratio, which will still be in the lower half of its 3.5 times to 4.5 times target range.
Growing its stable sources of cash flow
Kinder Morgan’s financial flexibility enables it to capitalize on opportunities to expand its already extensive position in the U.S. energy midstream sector. In addition to spending $640 million to expand its gathering and processing position in North Dakota, the company is investing $2.3 billion into growth capital projects this year. That’s an increase from $1.9 billion last year, driven by a string of recently approved natural gas pipeline expansion projects.
The company has secured three large-scale natural gas pipeline projects in recent months, representing $5 billion of future investment. That has helped grow its backlog of commercially secured projects to $8.1 billion at the end of last year, a 60% increase from the end of the third quarter. These projects should come online through the end of the decade and “are expected to contribute to significant future growth once in service,” stated CEO Kim Dang in the Q4 earnings press release.
Kinder Morgan sees significant expansion potential ahead, fueled by the expected surge in natural gas demand from rising exports and artificial intelligence (AI) data centers. That drives the company’s view that it will secure additional growth-capital projects in the coming months. Given its strong financial profile, it has plenty of financial flexibility to continue approving projects as new expansion opportunities arise.
A low-risk, high-yielding income stream
Kinder Morgan is a rock-solid dividend stock. Its stable cash flow easily covers its dividend payment. The company also produces plenty of excess cash to fund expansion projects while maintaining a strong balance sheet. Because of that, investors can take Kinder Morgan’s high-yielding dividend to the bank.
The pipeline giant should have no trouble growing its payout in the future (2025 will be the eighth year in a row that it has raised its dividend), making it a great option for those seeking an attractive and steadily rising passive income stream.
Matt DiLallo has positions in Kinder Morgan. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool has a disclosure policy.
