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This High-Yield Dividend Stock Is in a Class of Its Own

Matthew DiLallo, The Motley Fool

Pipeline giant ONEOK (NYSE: OKE) is a one-of-a-kind investment opportunity these days. Of the 500 companies in the S&P 500, it's the only one that meets five distinct characteristics of size, financial strength, earnings growth, dividend growth, and yield. That unique combination makes it an excellent choice for investors who want both high growth and a high yield.

Drilling down into the numbers

ONEOK highlighted the unique opportunity it offers investors in a recent presentation. The company noted that, of the 500 companies in the S&P 500, 372 had an investment-grade credit rating like ONEOK. Of that group, 227 had a large market cap of more than $20 billion, which put them in the same class as ONEOK. About half of those large companies are on pace to grow earnings per share by at least a 10% annual rate through 2020, like ONEOK.

However, just a dozen of those fast-growing companies also offered a high yield of more than 3%. Meanwhile, only one of those high-yielding dividend stocks expected to increase its payout by a 10% annual rate through 2020: ONEOK.

Rising coin stocks in the dirt with plants growing on top.

Image source: Getty Images.

The company then pulled back the lens a bit further and compared its forecast to the projections of the average stock in both the S&P 500 and the S&P High Yield Aristocrats, which are those in the broader S&P 1500 universe that have consistently increased their dividends for the past 20 years. Here's how the pipeline giant stacks up:

Metric

ONEOK

Median S&P 500

Median S&P High Yield Aristocrats

Approximate current dividend yield

4.6%

2.2%

2.4%

Annual EBITDA growth rate: 2018-2020

11%

6.9%

6.1%

Annual EPS growth rate: 2018-2020

10%

10%

7.7%

Annual dividend growth rate: 2018-2020

10%

6.2%

6.3%

Data source: ONEOK Investor Presentation. EPS = earnings per share.

As that table shows, ONEOK offers roughly double the current yield and almost twice the dividend growth as the average dividend stock in those indexes.

Why ONEOK stands apart

Several factors drive ONEOK's unique blend of yield and growth. First, the company generates very stable cash flow from its vast portfolio of energy infrastructure assets. Overall, 90% of the company's earnings come from predictable sources, like fee-based contracts. Because of that, ONEOK is more comfortable paying out a high percentage of its cash flow in dividends, with the company targeting a payout ratio of around 80%, which is well above the 57% average of stocks in the S&P 500.

That high payout ratio leaves ONEOK with less cash flow to reinvest back into its business to grow earnings. However, the company compensates for that by selling more shares and issuing additional debt to fund growth projects. 

Further, the expansions it has underway generate very high returns. Overall, ONEOK has $4 billion of projects under construction, which will drive earnings growth over the next few years. One of the largest is the Elk Creek Pipeline, which will move natural gas liquids (NGLs) from the Bakken Shale and Powder River Basin to a hub in Kansas. ONEOK expects to invest $1.4 billion in building the pipeline, which should generate $230 million to $350 million in annual EBITDA when it enters service by the end of next year, or an EBITDA multiple of four to six times. Most of its expansion projects carry returns in that range.

The company's average return multiple is higher than many rival pipeline companies will earn on their expansions. Kinder Morgan's (NYSE: KMI) aim going forward is to secure $2 billion of growth projects per year, which it believes can generate $300 million of incremental EBITDA. That's an average capital-to-EBITDA multiple of seven times and would only grow Kinder Morgan's EBITDA by 4% per year.

Meanwhile, the return multiples for many of the projects under development by Magellan Midstream Partners (NYSE: MMP) are in the six- to eight-times EBITDA range. Because of that, the $1.7 billion of expansion projects Magellan currently has underway only will generate about $250 million in incidental EBITDA. That's partially why Magellan Midstream expects to grow its payout at a slower pace of 8% this year and a 5% to 8% annual rate in 2019 and 2020, even though it plans on paying out the same percentage of its cash flow as ONEOK.

These dual fuels make ONEOK unique

ONEOK stands apart from most stocks because it pays out a much larger portion of its cash flow in dividends and earns very high returns on its expansion projects. Because of that, it offers the best combination of yield and growth in the S&P 500 these days. That unique blend makes it a compelling stock for both growth and dividend investors to consider buying.

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Matthew DiLallo owns shares of Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool owns shares of ONEOK. The Motley Fool has a disclosure policy.