We recently compiled a list of the 12 Best Dividend Stocks Under $25. In this article, we are going to take a look at where Kinder Morgan, Inc. (NYSE:KMI) stands against the other dividend stocks under $25.
Dividend stocks have remained important for investors, standing the test of time regardless of the market conditions. Dividends have historically contributed approximately one-third of the market’s total return since 1960. Among dividend strategies, investors tend to favor those that emphasize dividend growth over high yield. One of the main reasons for this inclination is that as these companies show more tangible results, investors gain confidence from seeing improvements in free cash flow, earnings, and dividend growth during a recovery, compared to more speculative options. In addition, as interest rates decrease with Federal Reserve rate cuts in an economic recovery, yield-oriented investors shift their investments from cash to dividend-paying stocks.
According to analysts, due to volatile economic conditions since 2020 and ongoing market uncertainties affecting corporate earnings, high-yielding companies lacking strong financial stability and discipline may face challenges sustaining future dividend payouts. These companies could be vulnerable to potential dividend cuts or suspensions. On the other hand, dividend growth strategies have demonstrated their effectiveness in both rising and falling interest rate periods. The Dividend Aristocrats index, which tracks the performance of companies with at least 25 consecutive years of dividend growth, delivered a 14.26% return during the falling interest rates period between May 2005 and March 2024, while high dividend stocks underperformed with over 10% return, according to a report ProShares. Similarly, in the rising interest rates period between this timeframe, dividend growers returned 10.26%, with high dividend stocks returning 9.22%. To learn more about dividend growth stocks, readers should have a look at Dividend Zombies and Kings with Longest Dividend Payouts.
Dividend growth strategies offer potential solutions to the challenges faced by high dividend-paying stocks in a rising-rate environment in two main ways. By prioritizing dividend increases over high yields, dividend growth stocks are less influenced by the value factor, which typically affects high dividend payers. This resilience allows dividend growth stocks to perform better in growth-oriented markets.
Given investors’ penchant for dividend-paying companies, businesses worldwide are consistently rewarding shareholders with dividends. According to Janus Henderson, dividends rose by 5% in 2023 to $1.66 trillion, marking the third consecutive year of record highs following a brief dip in payouts during the pandemic in 2020. The fund manager expects total dividends to reach a new peak of $1.72 trillion, reflecting a 3.9% increase on a headline basis. The payments indicate that balance sheets remain strong, despite a global economic downturn and increased costs associated with servicing debt. It also underscores the advantages for the banking sector of higher interest rates. Nearly half of last year’s dividend growth came from banks, which rewarded shareholders after experiencing a significant increase in profits from lending activities.
Our Methodology:
For this list, we used a stock screener to find dividend stocks trading below $25 as of June 21. From the initial list, we selected companies with dividend yields above 2% and a history of regular dividend payments, indicating sustainable dividends. Finally, we narrowed it down to 12 stocks that had the highest number of hedge fund investors, as tracked by Insider Monkey in Q1 2024. Hedge funds aren’t dividend investors; they invest in stocks for capital gains. Essentially, our list presents the best dividend stocks under $25 that have the potential to deliver large capital gains. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
Aerial view of an oil and gas pipeline, spanning vast landscapes.
Kinder Morgan, Inc. (NYSE:KMI)
Number of Hedge Fund Holders: 43
Share Price as of June 21: $19.6
Kinder Morgan, Inc. (NYSE:KMI) ranks third on our list of the best dividend stocks under $25. It is one of the largest energy infrastructure companies in North America, which owns and operates oil and gas pipelines and terminals. In June, Wells Fargo upgraded the stock to Overweight with a $22 price target, expecting growth in the company’s storage and pipeline segments. The firm highlighted the company’s favorable positioning to capitalize on multiple expansion opportunities. This was also seen in the company’s recent earnings report. It indicated an expected rise in demand for natural gas, specifically in electric generation. This increase will be driven by expanding operations in artificial intelligence, cryptocurrency mining, and data centers. The company views this growing demand as a significant contributor to its future growth prospects.
Kinder Morgan, Inc. (NYSE:KMI) is a solid bet for dividend investors, offering a steady stream of income to them. The company continues to meet its cash flow targets and objectives as planned. In the first quarter of 2024, the company generated over $1.2 billion in operating cash flow and its free cash flow was $570 million. Its dividend growth streak spans over seven years, which makes KMI one of the best dividend stocks on our list. The company’s quarterly dividend comes in at $0.2875 per share for a dividend yield of 5.72%, as of June 21.
Kinder Morgan, Inc. (NYSE:KMI) also reported a 7% year-over-year increase in its adjusted EBITDA. The company closed the quarter with a net Debt-to-Adjusted EBITDA ratio of 4.1 times, demonstrating its capability to handle debt obligations effectively. With a current debt-to-equity ratio of 1.01, the company expects to reduce its net Debt-to-Adjusted EBITDA ratio to 3.9 times by the end of 2024. Looking ahead, it forecasts an 8% year-over-year growth in adjusted EBITDA to reach $8.16 billion for FY24. Despite these positive metrics, the stock is trading at a forward P/E multiple of 15.58, which appears somewhat conservative considering its earnings growth and full-year outlook.
Of the 920 hedge funds tracked by Insider Monkey at the end of Q1 2024, 43 hedge funds owned stakes in Kinder Morgan, Inc. (NYSE:KMI), up from 42 in the previous quarter. These stakes are collectively valued at more than 41.1 billion. Among these hedge funds, FPR Partners was the company’s leading stakeholder in Q1.
Overall KMI ranks 3rd on our list of the best dividend stocks to buy under $25. You can visit 12 Best Dividend Stocks Under $25 to see the other dividend stocks that are on hedge funds’ radar. While we acknowledge the potential of KMI as an investment, our conviction lies in the belief that some deeply undervalued dividend stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued dividend stock that is more promising than KMI but that trades at less than 7 times its earnings and yields nearly 10%, check out our report about the dirt cheap dividend stock.
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Disclosure: None. This article is originally published at Insider Monkey.
