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If you bought Kinder Morgan (NYSE: KMI) stock at the beginning of 2019 for $15.20 a share, you would have earned more than a 32% return off dividends alone. But that’s about it, seeing as the stock price is up just 8.4% over that time frame compared to a 79% gain for the S&P 500.

So why buy a stock that continues to underperform the market? The easiest answer is that you might make that choice if you aren’t investing in the hopes of accruing outsized returns, but rather to generate a stable and steady passive income stream that can be used to supplement your income in retirement.

Kinder Morgan may lack the flare that comes with higher growth companies. But it can be just what you need to achieve your financial goals while also helping you sleep well at night. Here’s why it stands out as a top high-yield dividend stock to buy now.

Image source: Getty Images.

Getting back on track

Kinder Morgan exited the oil and natural gas crash of 2014 and 2015 with an overleveraged balance sheet and a broken business model. Since then, it has done an excellent job of deleveraging its balance sheet by taking an extremely cautious approach to capital spending — almost to a fault. However, Kinder Morgan’s prudence was grounded in restoring investor trust after it slashed its dividend. And the strategy has worked well.

KMI Net Total Long Term Debt (Quarterly) data by YCharts.

Since the beginning of 2015, Kinder Morgan has consistently paid down its debts while bringing down its debt-to-capital ratio — a financial metric that shows how dependent a company is on debt in its overall capital structure. It still has a long way to go if it wants to get to a really healthy balance sheet. But the improvements it has made so far are meaningful, especially in this high interest rate environment, which has raised the price of capital.

The following chart shows how Kinder Morgan drastically cut capital expenditures to the point where its interest expense exceeded them. However, its capital expenditures are up over 50% in the last two years, while its interest expense has climbed by 14%.

KMI Total Interest Expense (TTM) data by YCharts.

One of the reasons midstream stocks like Kinder Morgan have been under pressure is that these companies habitually carry a lot of debt, and that makes them vulnerable to higher interest rates. It’s also because the vast majority of their businesses are tied to stable fee-based contracts that aren’t impacted by oil and natural gas prices in the short term. So they haven’t benefited from high oil and natural gas prices.

Kinder Morgan has returned to growth

One of the exciting qualities of Kinder Morgan relative to other midstream companies is its exposure to U.S. natural gas exports, mainly through the liquefied natural gas (LNG) industry. A lot of the growth in natural gas has come from exports as developing nations look for a reliable energy source and developed nations look for energy security. Imported U.S. natural gas is one of the more safe and secure energy sources.

The growth of the LNG market, as well as other opportunities in legacy infrastructure assets and low-carbon efforts, have prompted Kinder Morgan to make some key acquisitions and boost its capital expenditures. But it’s doing so in a conservative way that shouldn’t jeopardize its dividend.

It has also begun to meaningfully buy back its stock. Again, not in a big way — it’s still spending about five times more on dividends than buybacks. The more Kinder Morgan can pay down debt and repurchase shares, the lower its interest expenses and dividend expenses will be. The company’s earnings and free-cash-flow growth are encouraging signs that the trend can continue.

A passive income powerhouse

At its current share price, Kinder Morgan’s dividend yield is 6.8% — more than four times the average yield of the S&P 500. But overall, it’s probably going to keep underperforming the broader market due to its low growth.

It’s not a stock for everyone. But over the last five years, Kinder Morgan has given its investors a steady stream of passive income — and that adds up over time.

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool has a disclosure policy.

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