HomeBusinessThis dividend stock with a 6.4% yield remains an extremely safe option...

This dividend stock with a 6.4% yield remains an extremely safe option for passive income

Kinder Morgan (NYSE: KMI) offers investors a large income stream. The natural gas pipeline giant currently yields 6.4%, which is one of the highest payouts in the US S&P500 (where the average is 1.4%). Despite the high yield, Kinder Morgan offers one of the safest income streams in that broad market index.

The safety of the payout was evident in the first quarter report. Here’s a look at those numbers and why they’re the pipeline inventory large dividend on a rock-solid basis.

No matter how stable things are

Kinder Morgan produced $1.4 billion, or $0.64 per share, in distributable cash flow (DCF) in the first quarter. DCF increased by 5% compared to last year per share.

It easily covered the company’s high-yield dividend, which was recently increased by about 2% to $0.2875 per share per quarter ($1.15 annualized). That was the seventh consecutive year in which the company increased its dividend.

The pipeline business continues to generate very stable and growing cash flow. About 68% of revenue comes from take-or-pay and hedging contracts, which lock in revenue. The majority of remaining revenue comes from long-term, fee-based contracts, limiting exposure to commodity price volatility.

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Meanwhile, stable cash flow sources are growing as the company expands its operations. Kinder Morgan achieved profit growth in 3 of its 4 operating segments in the first quarter:

A chart showing Kinder Morgan's first quarter revenue by segment in 2023 and 2024.

Data source: Kinder Morgan. Chart by the author.

Profits from the company’s core natural gas pipeline business rose 7% year over year. That improvement was fueled by higher margins from storage assets, higher volumes from collection systems and the acquisition of STX Midstream.

Kinder Morgan’s product pipeline business had an excellent quarter, with earnings growth of 17%. The company benefited from higher rates on existing assets and contributions from recently completed capital projects. Finally, terminal revenues increased 6%, driven by liquid terminal expansion projects and higher rates at Jones Act terminals.

The profit growth from these three segments more than compensated for the 4% profit decline from the CO2 activities. The main barrier was lower carbon dioxide sales volumes. The movements in commodity prices largely offset each other. Likewise, lower crude oil volumes offset higher production of natural gas liquids.

Kinder Morgan generated nearly $1.2 billion in cash flow from operations in the first quarter. It paid out about half of that money in dividends ($631 million) and used about half to finance capital expenditures ($619 million). This left the company with a small deficit ($61 million), which it could easily cover with its strong balance sheet.

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Kinder Morgan ended the period with a 4.1x leverage ratio, well within the target range of 3.5x-4.5x. That supported the company’s investment-grade credit rating.

On track for another solid year

Kinder Morgan’s solid first-quarter results kept the company on track to achieve full-year expectations. The natural gas pipeline company expects to produce about $5 billion, or $2.26 per DCF share. That would be dividend payout ratio around 51% this year, which is very conservative for a company that generates such stable cash flow.

As a result, it should generate just under $2.5 billion in free cash flow that it can use to fund capital projects and maintain its strong financial flexibility. It expects near-term capital expenditures to be at the higher end of the $1 billion to $2 billion annual range.

The company ended the first quarter with $3.3 billion of committed capital projects in its backlog, up from $3 billion at the end of last year. Kinder Morgan continues to find high-return expansion projects, with the majority (80%) focused on low-carbon energy such as natural gas, renewable natural gas and renewable fuels.

The midstream company’s growing earnings and expected excess free cash flow drive expectations that it will end this year with a leverage ratio of 3.9x. That gives it additional financial flexibility to make opportunistic acquisitions or share buybacks.

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An extremely solid dividend stock

Kinder Morgan generates a very sustainable cash flow that is steadily increasing. This allows the pipeline company to pay an attractive dividend, invest in its continued expansion and maintain a strong balance sheet. These features provide a solid foundation for the big payout, making Kinder Morgan an excellent option for those looking to earn a steadily increasing passive income stream.

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Matt DiLallo holds positions at Kinder Morgan. The Motley Fool holds and recommends positions in Kinder Morgan. The Motley Fool has a disclosure policy.

This 6.4% Yield Dividend Stock Remains an Extremely Safe Passive Income Option was originally published by The Motley Fool

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