With a yield near 5%, ONEOK (NYSE:OKE) is already a compelling stock for income seekers. However, with the company set to close the acquisition of its MLP ONEOK Partners (NYSE:OKS) at the end of this month, it's about to become a gold mine for income investors. That's because the company plans to boost the payout 21% upon closing the ONEOK Partners transaction and deliver 9% to 11% annual dividend growth through 2021.

Drilling down into the growth plan

At the center of ONEOK's dividend growth plan is bringing its MLP in-house, which will give it total control of its asset base. It's a portfolio that has grown not only in size but strength over the past few years due to ONEOK Partners' focus on building and buying fee-based assets as well as converting a larger portion of its legacy natural gas processing contracts to fee-for-service agreements instead of sharing a percentage of the proceeds. Those initiatives have not only grown its earnings from $1.7 billion in 2013 up to a projected $2.8 billion this year, but the percentage of its profits from fees have increased from 66% to 90%. Because of that, ONEOK's cash flow has become much more stable and predictable, which enhances the long-term sustainability of its dividend.

A group of pipelines.

Image source: Getty Images.

The other driver of that dividend growth plan is the company's intention to continue building high-return fee-based assets that will grow cash flows. Currently, the company has $1.5 billion to $2.5 billion of projects under development, spread across its three business segments. For example, just this week the company agreed to expand its infrastructure in the STACK play of Oklahoma. These expansions include spending $130 million to increase the capacity of the Sterling III Pipeline and connect its Arbuckle Pipeline to the Cajun-Sibon Pipeline owned by EnLink Midstream Partners (NYSE:ENLK) and EnLink Midstream (NYSE:ENLC). EnLink Midstream signed long-term contracts with ONEOK to back the projects, which will enable EnLink to meet expected volume growth from current and future processing capacity expansions in the STACK. 

Those projects, like most in the company's pipeline, don't require much capital. However, the company expects to earn attractive adjusted EBITDA multiples of five to seven times on these investments over the next several years. For perspective, rival Magellan Midstream Partners (NYSE:MMP) only expects to earn seven to nine times EBITDA on new projects in its backlog. Those higher returns enable ONEOK to efficiently increase cash flow, giving it more money for dividends.

An improving financial picture

While that visible growth from new projects is important, it means nothing to dividend investors if ONEOK can't support that growth with sound financials. At the moment, the company's balance sheet is less than ideal. On a consolidated basis with ONEOK Partners, the company ended last year with 5.2 times debt-to-EBITDA. That's an elevated level for a midstream company, which is why ONEOK has a junk-rated credit, and ONEOK Partners is at the bottom rung of investment grade. Contrast this with Magellan Midstream Partners, which is one of the highest-rated MLPs because it keeps leverage below 4.0 times, including a mere 3.5 times last quarter.

That said, by combining with ONEOK Partners, ONEOK expects its leverage to come down because it will generate substantial excess cash flow even after the big dividend increase. This year, for example, the company expects rising cash flow from new fee-based projects to push leverage down to 4.7 times. Meanwhile, ONEOK anticipates that leverage will steadily move closer to its target of less than 4.0 times in the future due to its plans to maintain at least 1.2 times dividend coverage through 2021 (which matches Magellan Midstream's current coverage ratio) even as it increases the payout.

That improving financial picture thanks to projections for healthy dividend coverage should give investors confidence that ONEOK can achieve its ambitious growth goals. It's a target that puts it ahead of most rivals, including Magellan, which only has the visibility that it can grow its payout 8% annually this year and next.

Investor takeaway

ONEOK should already be on the radar of income investors since its 5% yield is well above the market's average. However, that payout is on track for a hefty increase as soon as the company completes the acquisition of its MLP. Meanwhile, thanks to several high-return growth projects in development, and an improving financial picture, ONEOK appears poised to deliver healthy dividend growth over the next several years, making it a golden stock for income seekers.

The Motley Fool owns shares of and recommends ONEOK. The Motley Fool recommends Magellan Midstream Partners and ONEOK Partners. The Motley Fool has a disclosure policy.