Owning dividend-paying stocks can be a great way to generate passive income. The average dividend stock yields around 1.5%. At that rate, a $1,000 investment would produce about $15 in dividend income each year.
You can supercharge your dividend income by investing in stocks with higher-dividend yields. Pipeline stocks are great for those seeking a higher-octane income stream. Kinder Morgan(NYSE: KMI), Williams(NYSE: WMB), and Oneok(NYSE: OKE) are three top options for those seeking a lucrative and growing stream of passive income from the sector.
A top-ten income stream
Kinder Morgan operates the largest natural gas pipeline-transmission network in the country. It's also a leading refined-products transporter and terminal operator, one of the country's largest carbon dioxide transporters, and has a growing renewable natural gas-production business.
These businesses generate very stable cash flow. Roughly 68% of its cash flow comes from take-or-pay and hedging contracts, meaning Kinder Morgan gets paid the contract rate regardless of commodity prices or volumes. Meanwhile, most of the rest of its cash flows are fee-based and only have volume risk.
Kinder Morgan expects to produce about $5 billion in cash this year, $2.6 billion of which it expects to pay out in dividends. It uses the cash it retains to fund expansion projects and maintain a strong financial position. The company's growth projects will increase its cash flow, giving it more fuel to pay dividends. It currently has a nearly 5.5% dividend yield, one of the 10 highest in the S&P 500. That means you could collect about $55 of passive income each year from every $1,000 invested into its stock. It delivered its seventh-straight year of dividend increases earlier this year.
Decades of dividends
Williams is a leader in natural gas infrastructure. It handles about a third of all the gas used in the country each year. It operates the country's largest interstate-gas pipeline by volume and operates fee-based gathering and processing assets across a dozen key supply areas.
The gas pipeline giant's operations generate significant and stable cash flows. It expects to produce about $5 billion in cash this year. That's enough to cover its dividend (which yields over 4%) by more than two times.
Williams has paid dividends for 50 straight years. It has increased its payout at a 6% compound annual growth rate (CAGR) since 2018. It should have plenty of fuel to continue increasing its dividend in the future.
Powering that view is the growing demand for natural gas. That has enabled the company to secure several expansion projects that give it visibility into its cash-flow growth through 2027. It has many more projects under development that could extend its growth outlook even further into the future.
A quarter century of stability and dividend growth
Oneok is one of the largest diversified energy-infrastructure companies in the country. It has an extensive network of natural gas liquids, natural gas, refined products, and crude oil pipelines and related assets. Those midstream assets generate very predictable fee-based cash flow.
The pipeline company's stable assets have allowed it to pay a very durable dividend. Oneok has delivered more than 25 years of dividend stability and growth. It has increased its payout by a peer-leading rate of more than 150% over the last 10 years.
Oneok has significantly enhanced its ability to continue growing its dividend in the future. It completed a transformational transaction last year, acquiring Magellan Midstream Partners in a nearly $19 billion deal. The highly accretive transaction enhanced its diversification. The company expects the deal will deliver free-cash-flow per-share accretion averaging more than 20% through 2027. That helps fuel its view that it can grow its dividend (which yields more than 4%) by 3% to 4% annually.
The company is further enhancing its growth profile by making another $5.9 billion in acquisitions this year. It's acquiring Medallion Midstream and a stake in EnLink Midstream. It eventually plans to buy out the remaining interest in EnLink from public investors. These investments will further increase its free cash flow per share, providing additional fuel to increase its dividend in the future.
Your pipeline to passive income
Kinder Morgan, Williams, and Oneok generate very stable cash flow. That gives them money to pay attractive dividends and invest in growing their midstream networks, which should fuel future-dividend increases. Those features make them ideal options for investors seeking a high-octane income stream.
Should you invest $1,000 in Kinder Morgan right now?
Before you buy stock in Kinder Morgan, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Kinder Morgan wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $729,857!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of September 16, 2024
Matt DiLallo has positions in Kinder Morgan. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool recommends Oneok. The Motley Fool has a disclosure policy.
