There's plenty to like about ONEOK (OKE 0.25%). For starters, the pipeline and processing company currently offers investors an attractive 5.6%-yielding dividend that it expects to grow by 9% to 11% annually through 2021. However, while that combination makes ONEOK a potential gold mine for income investors, they are paying a premium price for that growing income stream since the stock currently sells for about 15.3 times distributable cash flow, which is above the 14.9 times average of its peer group.
As a result, investors who are bullish on ONEOK will love to know that fellow pipeline giants Enbridge (ENB -0.25%) and Kinder Morgan (KMI -0.03%) offer similarly generous dividends for a much lower price. Furthermore, their payouts are on an even more sustainable footing, and they have better visibility into future growth.
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A deep discount north of the border
Canadian energy infrastructure giant Enbridge (ENB -0.25%) matches up well with ONEOK since it currently yields 4.7% and expects to increase its payout by a 10% rate through 2020. Also, Enbridge backs that growth rate with a whopping 22 billion Canadian dollars' ($17.5 billion) worth of growth projects that are currently underway, which will fuel 10% earnings growth through 2020. That secured project backlog is noteworthy since ONEOK has only locked up about $500 million of the $1.5 billion of projects it needs to fuel dividend growth at the low end of its range.
Another factor to consider is that while Enbridge does yield less than ONEOK, that's because the Canadian pipeline company only pays out about 65% of its cash flow to support its dividend while ONEOK paid out 78% last quarter and planned to pay out about 80% in the future. By paying out less of its cash flow, Enbridge's dividend is at a more sustainable level, and it has more cash to help finance expansion projects.
That said, the biggest difference between the two is that Enbridge sells for a much cheaper price at just 11.5 times its cash flow forecast for 2018. To put its valuation discount into perspective, if Enbridge traded at the same cash flow multiple as ONEOK, its stock would be nearly 33% higher.
A high-yield stock in hiding
Natural gas pipeline giant Kinder Morgan currently yields just 2.8%. However, that's a bit deceiving because the company plans to increase its payout by 60% this year, which would push its yield closer to 4.4%. In addition, even after making that substantial increase, it would still be paying out less than 40% of its cash flow. Meanwhile, Kinder Morgan also expects to increase its payout by 25% in both 2019 and 2020. That represents a jaw-dropping 36% compound annual growth rate in the dividend, and the 2020 level would still only consume about 60% of Kinder Morgan's cash flow, assuming it doesn't grow. That said, the pipeline giant currently has more than $12 billion of expansion projects underway, and recently secured another large project, which should significantly increase cash flow in the coming years and should keep its payout level around 50% of cash flow.
Not only does Kinder Morgan have greater visibility into future growth and a much more sustainable dividend level, but it sells for a dirt-cheap price of just 8.8 times 2018 cash flow. That makes it by far the cheapest pipeline stock to buy and could deliver significant returns for investors in the coming year if they start valuing it closer to the peer group average.
Looking beyond the high yield
ONEOK is an excellent stock for investors seeking a high dividend yield that appears poised to grow at a high rate in the coming years. However, investors could earn even higher total returns with Enbridge and Kinder Morgan because they offer similar income growth potential along with greater upside as their valuations eventually nudge closer to the peer group average. That could enable them to outperform ONEOK by a wide margin in the coming years.
