Kinder Morgan(NYSE: KMI) is one of the more popular dividend stocks, and it's easy to see why. The natural gas pipeline giant currently offers a 6.1% dividend yield, one of the highest in the S&P 500. That big-time payout is on rock-solid ground, making it an excellent option for those seeking to collect steady dividend income.
However, if there's a knock against Kinder Morgan, the pipeline giant has struggled to grow over the years. That's why investors who like Kinder Morgan should check out fellow natural gas pipeline stockWilliams(NYSE: WMB). While Williams currently has a lower dividend yield (4.8%), it could continue growing faster than Kinder Morgan in the future.
A slow and steady grower
Kinder Morgan has been in a bit of a rut for much of the past several years. Last year, it generated $7.5 billion of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). That was flat with both 2022's and 2018's levels.
Two headwinds have weighed on Kinder Morgan's growth in recent years. First, it has sold billions of dollars in assets to repay debt. Those sales have helped drive its leverage ratio down by 26% since 2016 to a much more comfortable 3.9 times (well below its long-term target of 4.5 times). Second, it has had to address large contract rollovers on several pipeline systems.
On a more positive note, those headwinds will fade this year. That will enable the company to benefit from several growth drivers, including recently completed expansion projects and its recent $1.8 billion acquisition of STX Midstream. Those catalysts should boost its adjusted EBITDA by about 8% in 2024.
Meanwhile, the company has about $3 billion of high-return expansion projects in the backlog to drive future growth. It also has a much stronger balance sheet, giving it lots of flexibility to make acquisitions to accelerate growth.
However, despite that growth, the company will likely only provide modest dividend increases in the future. It expects to raise its payout by about 2% this year, roughly in line with its recent pace. While investors can expect to collect a high-yielding and modestly rising dividend, that might not be exciting enough for some to own the stock.
More fuel to grow
Williams hasn't faced the same headwinds as Kinder Morgan in recent years. Because of that, the company has grown its adjusted EBITDA at an 8% compound annual rate since 2018 to its current level of $6.8 billion. The natural gas pipeline company has delivered that growth while also cutting leverage by 25% since 2018 to its current level of 3.6 times.
The company expects to continue expanding at a solid rate. Its long-term target is to grow its adjusted EBITDA at a 5% to 7% annual rate. It has a large backlog of expansion projects to fuel its growth, with projects lined up to come online through 2027.
It expects to invest $3.4 billion into growth capital projects over the next two years alone. On top of those secured projects, it's pursuing 30 additional natural gas transmission projects that could fuel its growth well into the next decade.
Meanwhile, its low leverage ratio gives it lots of financial flexibility to make acquisitions to support its growth target. It recently bought a major natural gas storage portfolio for roughly $2 billion. That followed two notable deal closings in 2023 (its $1.5 billion acquisition of MountainWest and $1.3 billion of strategic transactions to strengthen its position in the DJ Basin).
It has made $6.1 billion in acquisitions since 2021. Given its low leverage ratio, Williams has the flexibility to make additional acquisitions as opportunities arise.
Williams' faster earnings growth has enabled it to deliver a higher dividend growth rate. It has grown its payout at a 6% compound annual rate since 2018, including by 6.1% earlier this year. Given its low dividend payout ratio (2.3 times coverage in 2024, compared to about 2 times for Kinder Morgan) and faster-projected earnings growth rate, it could continue to deliver mid-single-digit dividend growth.
A little bit more fuel than Kinder Morgan
Kinder Morgan is a great stock for those seeking a high-yielding and reliable income stream that should rise at a modest pace over the long term. While Williams doesn't offer as high a yield as Kinder Morgan, it's growing its earnings and dividend faster. Because of that, it could produce higher total returns over the long term. That makes it a potentially more compelling option, compared to its more popular peer.
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Matt DiLallo has positions in Kinder Morgan. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool has a disclosure policy.
