KMI Stock: Is Kinder Morgan, Inc.’s 7.5% Dividend Yield Safe?

kmi stockKMI Stock is Still Paying Out Dividends Despite Low Oil Prices

Top energy mid-stream company Kinder Morgan, Inc. (NYSE:KMI) has been taking a beat on the market at the hands of bearish analysts. Kinder Morgan stock has dropped close to its all-time lows in the recent months, as the declining oil and natural gas prices continue to weigh heavily on the stock.

However, there’s one aspect that makes KMI stock one of the best picks for retirement portfolios at the current low levels: its healthy dividend stream.

Kinder Morgan is My Favorite Stock for Dividend Income

Kinder Morgan stock may have hit a rough patch this year, but its dividend prospects have been becoming increasingly attractive. Kinder Morgan is a midstream company that supplies oil and natural gas through a massive network of pipelines, primarily in the U.S. and Canada. Kinder Morgan, formerly a tax-advantaged  as an master limited partnership(MLP), is now organized as a C-Corporation and distributes sizeable returns to KMI stockholders in the form of hefty dividends.

KMI stock investors have the choice to either go for its common stock or preferred stock, both of which offer one of the highest dividend yields in the industry.

Kinder Morgan’s common stock offers a healthy 7.46% dividend yield. The company has a track record of having stepped up dividends in the last four years, exceeding expectations every time. The company also had a recent preferred stock offering, which are convertible to common stock in three years and offer a yummy 9.75% coupon. Kinder Morgan’s dividend payout is expected to increase another 10% per year over the next five years.

However, KMI investors need to bear in mind that the stock is more suitable for its steady income than its capital gains potential. Kinder Morgan management chooses to give away almost all of the earnings in dividends and instead raises capital via debt or equity offerings. This is why the company has a high debt load and often diluted share prices.

A healthy sign is that over 70% of the outstanding KMI stocks are either held by insiders or institutions. Company CEO and founder Richard Kinder is the biggest shareholder in the company while insiders hold over 13% of the outstanding KMI stock, bearing a huge interest in the company.

Many cite the recent slump in natural gas and oil prices to continue to stall its revenue growth. But what they overlook is its solid revenue mix, which is largely fee-based. Plus, the company uses commodity hedging to ward off negative effects of plummeting commodity prices.

Now, natural gas is the company’s most important business. To put it into perspective, natural gas alone generates more than half of its cash flows. The company is the third-largest mover of natural gas in the U.S. As our country continues its steady leap towards cleaner energy resources, coal-backed energy generation is quickly becoming redundant. The next big alternative in the energy mix is natural gas; which is quickly gaining ground. The rising demand is expected to have a positive bearing on its price in the coming years.

kmi kinder morgan stock chart

Chart courtesy of

The Bottom Line on KMI Stock

The company may have faced some headwinds due largely to the slump in commodity prices, but I see a silver lining in KMI stock. The company’s solid revenue structure, including take-or-pay and fee-based contracts and commodity hedging have helped it stay afloat despite the unfavorable environment. Also, the company’s expansion towards the South has promising growth potential going forward.

Bottom line, KMI stock can provide a stable income stream to investors’ long-term retirement portfolios in the current low interest rate environment. As the largest KMI stockholder, Richard Kinder, says, “I think in the long run, markets are rational. In the short term, they can be irrational.”

Correction: The story earlier mentioned Kinder Morgan to be an MLP. A correction has been made to its corporation status.

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