Why It Might Not Make Sense To Buy Kinder Morgan, Inc. (NYSE:KMI) For Its Upcoming Dividend

Readers hoping to buy Kinder Morgan, Inc. (NYSE:KMI) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 30th of July, you won't be eligible to receive this dividend, when it is paid on the 15th of August.

Kinder Morgan's upcoming dividend is US$0.25 a share, following on from the last 12 months, when the company distributed a total of US$1.00 per share to shareholders. Based on the last year's worth of payments, Kinder Morgan has a trailing yield of 4.8% on the current stock price of $20.65. If you buy this business for its dividend, you should have an idea of whether Kinder Morgan's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Kinder Morgan

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Kinder Morgan paid out 90% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. A useful secondary check can be to evaluate whether Kinder Morgan generated enough free cash flow to afford its dividend. It paid out 98% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

As Kinder Morgan's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's not ideal to see Kinder Morgan's earnings per share have been shrinking at 2.8% a year over the previous five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Kinder Morgan has seen its dividend decline 1.8% per annum on average over the past 8 years, which is not great to see.

To Sum It Up

Is Kinder Morgan worth buying for its dividend? Not only are earnings per share declining, but Kinder Morgan is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Kinder Morgan.

Curious what other investors think of Kinder Morgan? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.