Meet the 5.4% dividend stocks that will crush the S&P 500 and Nasdaq Composite in 2024

After years of failing to meet market expectations, Kinder Morgan (KMI -1.85%) is finally having a breakout year. The stock is up 21% year to date and recently hit a new five-year high, even as the energy sector underperforms S&P500 So far this year.

Here’s why the pipeline and infrastructure company’s future looks bright—and why it’s a dividend stock to buy now.

Kinder Morgan continues to meet expectations

Over the past few years, Kinder Morgan has had a solid track record and made a number of small and mid-sized acquisitions in oil and gas infrastructure assets, liquefied natural gas (LNG) and renewable natural gas (RNG). LNG is natural gas that has been cooled and liquefied so it can be shipped overseas. RNG is a pipeline-quality gas produced from decaying organic matter in landfills, cow manure, sewage or food waste, rather than from fossil fuels.

Kinder Morgan has done a good job of balancing investment with financial discipline. It continues to reduce leverage and plans to end the year with a net debt to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio of just 3.9. Kinder Morgan has come a long way since the oil and gas crash of 2015. It has reduced its long-term net debt by 29% — making the company more financially stable, allowing it to use cash flow to pay dividends and reinvest in the business rather than being under pressure to repay debt.

Full-year guidance calls for a 15% increase in earnings per share to $1.22 and a $1.15 dividend per share. At first glance, Kinder Morgan’s dividend seems barely affordable, considering it’s almost as high as earnings estimates. However, Kinder Morgan generates plenty of distributable cash flow (DCF) to cover the growing dividend payout — forecasting a $2.26 DCF per share for the full year.

Kinder Morgan uses DCF instead of net income to evaluate asset performance and dividend availability. Operating expenses and sustaining capital are deducted to determine DCF, while GAAP net income is reduced by depreciation and amortization.

In summary, Kinder Morgan ticks all the boxes because it can return capital to shareholders while maintaining a healthy balance sheet and investing in future growth. The rosy outlook may be why the stock is outperforming Nasdaq CompositeS&P 500 and the energy sector year-over-year.

KMI data by YCharts

A new catalyst for growth

In addition to the company’s performance and its 5.4% yield, another factor driving Kinder Morgan is its future earnings outlook. Kinder Morgan makes money by building infrastructure, such as pipelines, terminals and storage facilities, and then generating stable cash flows from those assets over time. Kinder Morgan depends on demand for natural gas and oil to justify its capital-intensive projects. LNG exports have been a multi-decade catalyst for Kinder Morgan, but domestic consumption could stagnate or even decline over time as it transitions to cleaner energy sources.

Complex artificial intelligence (AI) models require huge amounts of computing power—which is driving demand for more data centers. More data centers mean more electricity is needed to keep graphics processing units and related equipment cool and running. During the company’s second-quarter 2024 earnings conference call, CEO Rich Kinder discussed why the technology sector has been an unexpected boon for Kinder Morgan and its peers:

The anecdotal evidence from the past few months has been staggering. Let me give you a few examples. In Texas, the largest energy market in the U.S., ERCOT now projects that the state will need 152 gigawatts of generating capacity by 2030. That’s a 78% increase from its peak 2023 demand of about 85 gigawatts. This new estimate is up from last year’s estimate of 111 gigawatts for 2030. Other anecdotal evidence also supports a strong growth scenario. For example, one report indicates that Amazon alone is expected to add more than 200 data centers over the next few years, which is in line with the big expansions being made by other tech companies as they chase the need to serve demand for artificial intelligence. Annual growth in electricity demand over the past 20 years has averaged about 1.5%, and over the past 60 days, we’ve seen industry experts forecasting annual growth between now and 2030 ranging from 2.6% to one forecast of a whopping 4.7%.

Kinder Morgan is well-positioned for a future that requires more energy. It doesn’t particularly care what the end use case for natural gas is (power generation, industry, trade, transportation, etc.), as long as demand grows. While Kinder Morgan benefits from higher oil and gas prices, its business relies on collecting fees from long-term contracts to transport those fuels — meaning it’s not as price-sensitive as an exploration and production company.

Sure, many big tech companies have been adamant about moving to net-zero carbon emissions. Amazon Web Services may be the single biggest contributor to data center growth. But Amazon has clear goals for moving to renewable energy. In July, Amazon announced that 100% of the electricity it uses across its global operations (including its data centers) is now renewable energy — a goal it originally set for 2030. It achieved that goal through a combination of capital investments in its own projects and renewable energy purchases.

In summary, it is still unclear what role natural gas will play in the future grid, even if demand for electricity increases.

More reasons to buy Kinder Morgan stock

Kinder Morgan stands out as a reliable source of passive income due to its slow and steady growth and high profitability. The investment thesis focused on domestic oil and gas consumption. While this remains a key aspect of the business, the growth of LNG and RNG, the need for safer and more secure networks, and AI-driven electricity use have strengthened the investment thesis as they reinforce the need for more projects.

Even with its recent rally, Kinder Morgan is not a cheap stock, with a price-to-earnings ratio of 19.4 and a price-to-free cash flow ratio of 11.9. Kinder Morgan is worth considering if you believe natural gas and oil will play a key role in the future energy mix in the U.S. and abroad.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Kinder Morgan. The Motley Fool has a disclosure policy.