Better Dividend Stock: Williams vs. Kinder Morgan

Kinder Morgan (NYSE: KMI) and Williams (NYSE: WMB) are two of the largest natural gas pipeline companies in the country. Their extensive infrastructure generates very stable cash flow, enabling the companies to pay high-yielding dividends -- recently 4.3% for Kinder Morgan and 3.5% for Williams -- and invest in expanding their pipeline networks. Those growth projects give them the fuel to increase their dividends.

Most investors likely will only want to own one of these high-yielding pipeline stocks in their portfolio. Here's a look at the best one to buy right now for dividend income.

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Drilling down into their financial profiles

Many investors will take one look at the dividend yields currently offered by Kinder Morgan and Williams and automatically assume that Kinder Morgan's higher-yielding payout makes it the better option. However, it's more important to ensure that any high-yielding dividend is sustainable. With that in mind, here's a closer look at their financial profiles:

Data sources: Kinder Morgan and Williams.

As that table shows, the pipeline companies have very similar financial profiles. While Williams has a lower leverage ratio, Kinder Morgan's is trending toward the lower half of its 3.5-to-4.5 target range. It currently expects to end 2025 with a 3.8 leverage ratio. Meanwhile, they have the same bond ratings of BBB/Baa2.

The two pipeline companies also have similarly stable cash flow profiles, with the bulk of their earnings backed by long-term, fee-based contracts and government-regulated rate structures. They both produce enough stable cash to cover their dividends and capital spending with room to spare. Williams generated nearly $100 million in excess free cash flow after capital spending and dividends last year, while Kinder Morgan produced about $450 million.

The big difference in dividend yield comes down to valuation. Williams reported $1.92 per share of adjusted earnings last year. With its stock price recently right around $57, it trades at nearly 30 times earnings. Meanwhile, Kinder Morgan's adjusted earnings were $1.15 per share. With its share price around $26.50, it trades at 23 times earnings.

A look at their growth profiles

Another factor to consider is their ability to increase their high-yielding dividends. Williams has grown its dividend at a 5% compound annual rate over the past five years, including by 5.3% for 2025. This year will mark Kinder Morgan's eighth straight year of dividend growth. However, it has been increasing its payment at a more modest 2% annual rate in recent years.

Both companies have a lot of growth coming down the pipeline. Williams expects to spend about $1.8 billion on growth capital projects this year. Meanwhile, it has a large backlog of expansion projects currently under construction that should add to its bottom line through the end of the decade.

Kinder Morgan also has a large set of expansion opportunities. It expects to spend about $2.3 billion on growth capital projects this year. Meanwhile, it has added over $5 billion to its long-term capital project backlog in recent months, increasing it by 60% over the past quarter to more than $8 billion. These projects also have in-service dates through 2029.

Expansion projects should give these pipeline companies the fuel to continue growing their cash flows and dividends. Williams is targeting 5% to 7% annual earnings growth over the long term, which could fuel a similar rise in its dividend. Meanwhile, Kinder Morgan's earnings growth rate has reaccelerated over the past year. It should really start hitting its stride in 2027, when the first of three major natural gas pipeline projects enters commercial service.

Kinder Morgan stands out

Williams and Kinder Morgan both pay high-yielding dividends backed by their irreplaceable natural gas infrastructure. However, Kinder Morgan offers dividend investors a higher yield backed by a similarly strong financial profile. While it has grown its payout at a slower rate in recent years, it should reaccelerate in the future as the company completes its current expansion wave. It offers more income now and in the future, making it the better dividend stock to buy right now.

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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.