The average dividend-paying stock in the S&P 500 currently yields 1.8%, which isn't that enticing to most income-focused investors. Yield-seekers, however, do have plenty of attractive options in that index if they know where to look. One of the best places these days is the pipeline sector, which boasts several big-time yields. Even better, those payouts are on rock-solid ground, making them lower-risk ways to collect an attractive income stream.
Three of the top options are Kinder Morgan (KMI 2.15%), ONEOK (OKE 4.91%), and Williams Companies (WMB 2.99%). Here's why yield seekers will want to take a closer look at this trio.
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Steady as it goes
Kinder Morgan recently reported its fourth-quarter and full-year results, which were right on the money. Overall, the company's cash flow rose about 6% last year to nearly $5 billion, or $2.19 per share, which was within 0.5% of its budget despite several headwinds. That gave the company enough cash to pay its currently 4.7%-yielding dividend with so much room to spare that it funded its entire expansion program and paid off some debt.
While the company expects its cash flow to rise only about 2% this year because it sold some assets, that's enough money to cover its dividend as well as capital spending. Accordingly, Kinder Morgan plans to give its investors a 25% raise when it declares its next dividend, which implies a 5.9% yield at the current stock price. It can easily afford that increase since it's in its best financial shape in years, thanks to the recent sale of its Canadian operations.
Pedal to the metal
ONEOK is nearing an inflection point. The pipeline company has poured billions of dollars into expanding its footprint over the past few years and expects to put the finishing touches on five growth projects by the end of the current quarter. Those expansions will give the company the fuel to grow its earnings by more than 20% this year.
That fast-growing cash flow will further enhance the company's already solid financial metrics. That means ONEOK will be able to continue growing its dividend, which currently yields slightly more than 5% after it boosted it another 2.2% in January, and nearly 9% over the past year.
Meanwhile, ONEOK has plenty of growth still to come, since it has several more expansion projects that should start-up in early 2021. As a result, the company should have plenty of fuel to keep increasing its high-yielding payout for at least the next couple of years.
A big yield with plenty of growth ahead
Williams Companies offers investors the highest yield of this trio at 7.7%. While higher yields often imply more risk, that's not the case with Williams. That's because its leverage ratio is around the same level as Kinder Morgan's and ONEOK's. Meanwhile, its dividend payout ratio is a bit more conservative than ONEOK's, though not quite as low as Kinder Morgan's. Adding to the payout's sustainability is that Williams is on track to generate enough cash to cover its dividend, which it intends on increasing another 5% this year, with enough room to spare to more than finance all its growth spending.
Those expansion-related investments have it on track to grow its cash flow by about 5% this year. Meanwhile, it has the financial capacity to self-fund enough projects each year to grow its cash flow at a 5% to 7% annual rate. That forecast suggests Williams could continue increasing its dividend by around that same yearly pace.
Low-risk yield with upside
All three of these pipeline companies generate a lot of cash, which gives them the funds to pay attractive dividends and invest in expansion projects. Meanwhile, as those growth projects come online, they'll provide these companies with more cash to potentially grow their dividends. That low-risk income with some upside makes this trio of pipeline companies excellent options for dividend investors to consider buying.
