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Investing in These Stocks Could Enrich Your Retirement

Matthew DiLallo, The Motley Fool

Among the biggest problems many retirees face is that while they live on a fixed income stream, their expenses tend to grow, especially medical costs. That can force some retirees to take less-than-desirable actions such as getting a second job to bolster earnings or cutting spending by forsaking things they enjoy. Another way retirees could solve this problem is by investing in companies that pay a steadily rising dividend, which will provide them with an increasing supply of income during retirement. 

Three companies that appear poised to grow their dividends in the coming years are energy infrastructure giants Enbridge (NYSE: ENB), ONEOK (NYSE: OKE), and Williams Companies (NYSE: WMB). Not only do all three offer an above average payout today, but each also expects to boost its dividend at a healthy rate in the coming years.

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A dividend growth giant

Enbridge is the largest energy infrastructure company in North America, as it transports 25% of the continent's oil and 18% of its natural gas. The Canadian company gets paid fees backed by long-term contracts as those volumes flow through its various pipeline systems, which enables it to generate predictable cash flow. The company currently pays out about 65% of that money to investors with a dividend that yields an attractive 6.1%, which is triple that of the average stock in the S&P 500. It further supports that payout with a strong balance sheet.

Enbridge is currently in the second year of a three-year strategy to grow its cash flow and dividend at a 10% compound annual rate. Supporting that outlook are the $16 billion Canadian ($12 billion) of expansion projects the company has under construction. Looking further ahead, Enbridge believes it will have the financial capacity to fund CA$5 billion-CA$6 billion ($3.7 billion-$4.5 billion) of expansion projects per year after 2020, which should support 5% to 7% yearly growth in cash flow per share and a similar growth rate in the dividend.

A high-yield and a high growth rate

ONEOK focuses on a niche in the energy midstream sector as it primarily transports and processes natural gas liquids (NGLs), which are important for the petrochemical industry. Like Enbridge, ONEOK collects a steady supply of fees from long-term contracts as NGLs and natural gas flow through its systems. The company currently pays out roughly 73% of that cash flow in support of a dividend that yields 5%. It further supports that payout with a top-notch balance sheet.

ONEOK uses the remaining cash and its balance sheet strength to invest in high-return expansion projects. The company currently has $6 billion under construction, which position it to grow cash flow by 6% this year and at a more than 20% rate in 2020 when the bulk of its expansions will be online. That outlook leads ONEOK to believe it can increase its dividend at a 9% to 11% annual rate through at least 2021. Meanwhile, with a rising stream of excess cash, the company should be able to support healthy growth well beyond that time frame, especially considering that the industry needs to invest roughly $50 billion in building additional NGL-related infrastructure through 2035.

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Image source: Getty Images.

Gas-powered dividend growth

Williams Companies is one of the largest natural gas infrastructure companies in the U.S., handling 30% of the country's supply. The company also collects steady fees backed by long-term contracts, which provides it with stable cash flow. It currently pays out about 59% of that cash flow via a dividend that yields 5.4%. The gas pipeline giant also has a solid balance sheet that enhances the long-term sustainability of its payout.

Williams expects to use the free cash it produces after paying its dividend as well as its balance sheet flexibility to invest between $2.7 billion and $2.9 billion on additional expansion projects this year. That should help boost cash flow so that it can support another 10% to 15% increase in its dividend while maintaining a similar payout ratio. Looking further ahead, Williams believes it can secure enough expansion projects to grow earnings by a 5% to 7% annual rate beyond this year, which could support similar increases in its dividend.

High yields and healthy growth could produce a happier retirement

This trio of energy infrastructure companies each pays well above average dividends that they support with stable cash flow and conservative financial metrics. Meanwhile, all three expect to grow their cash flow at a healthy pace in the coming years as they continue expanding their footprints to support the booming North American oil and gas industry. That should enable these companies to keep increasing their dividends each year, which could give retirees the cash to help meet their needs. Add in the potential for some sizable gains in their stock prices because of the anticipated earnings growth, and these companies could enrich retirees in the coming years.

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