While growth stocks grab all the headlines and generate all the hype, dividend-paying stocks have handily outperformed their nonpaying peers over the years, with dividend growth stocks leading the charge. That's why I've built my portfolio on income-producing stocks and am always on the lookout to strengthen that foundation by investing more money into dividend payers.
Two companies that I've got my eye on at the moment are natural gas pipeline giants Kinder Morgan (KMI -0.32%) and Williams Companies (WMB 0.31%). Not only do both offer high-yield dividends -- 4.5% and 5%, respectively -- but those payouts should increase at healthy rates in the coming years. The kicker: These stocks are trading at attractive prices right now.
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The dividend is great, but the valuation is even better
While I already own a boatload of Kinder Morgan's stock, I'm thinking about adding to my position once again because of all the positives I see ahead for the pipeline giant. After spending the past couple of years focused on shoring up its financial situation, Kinder Morgan has opened the taps and started returning more cash to investors this year by boosting its dividend an eye-popping 60%. However, even at that much-higher rate, Kinder Morgan is only paying out 40% of its anticipated cash flow, which is very low for a pipeline company. Because of that, Kinder Morgan expects to increase its payout by another 25% next year and at that same pace in 2020, which is the best dividend growth forecast in the pipeline sector.
While that fast-growing high-yield payout is reason enough to consider buying Kinder Morgan's stock these days, what put it at the top of my list is its valuation. The pipeline giant currently trades for less than nine times cash flow, which is dirt cheap compared to rivals -- the average pipeline stock trades at around 12 times cash flow. So Kinder Morgan offers a compelling blend of income and growth at a deeply discounted price, which could be just the ticket needed to deliver outsize returns in the coming years.
A solid income stock that's now on sale
Williams Companies has been one of the worst-performing energy stocks so far this year, losing about 10% of its value. As a result, Williams' valuation has fallen to about 12.5 times cash flow, which is around the peer group average. While it's not as appealing as Kinder Morgan on that front, Williams still holds lots of attraction overall.
For starters, Williams made several moves in the past year to shore up its financial situation, including recently announcing the acquisition of its MLP Williams Partners (NYSE: WPZ). That transaction will not only simplify Williams' organizational structure, but it will also improve its credit profile and dividend coverage, which will enhance the foundation of its high-yielding dividend.
Once that deal closes, Williams' dividend will only consume about 63% of its cash flow, which is conservative for a pipeline stock. Meanwhile, with several large expansion projects underway, Williams expects to be able to grow its dividend 10% to 15% in 2019, while paying out less than 60% of its anticipated cash flow.
With earnings and the dividend growing at a double-digit pace in the next year, and ample expansion projects to fuel fast-paced growth beyond 2019, Williams could deliver total annual returns in the mid-teens from here. That potential for market-beating returns puts it on my short list of dividend stocks that I'd consider buying right now.
It's a tough choice
I'm currently weighing my options as I consider my next dividend stock purchase. Topping my list are Kinder Morgan and Williams Companies because both have rock-solid payouts that they expect to increase at a healthy rate in the future. While I'm leaning toward buying more Kinder Morgan because its lower valuation could fuel higher total returns in the coming years, Williams also has ample upside potential. Both look like great dividend stocks to buy right now.
