Investors seeking growth typically don't find dividend stocks attractive. However, there are several dividend-paying companies that also offer attractive growth, generating significant price returns. One such energy stock is ONEOK (OKE -0.41%).
Let's take a closer look at why ONEOK is one of the best stocks to generate a steady passive income stream for years.
Proven performance track record
To begin with, ONEOK has generated steadily growing earnings for decades. This steady growth allowed the company to maintain or grow its per-share dividend for more than 25 years. In the second quarter, ONEOK again reported a 21% increase in its net income. Higher fee rates and increased volumes benefited the natural gas liquids segment, higher commodity prices helped the natural gas gathering and processing segment, and increased storage services contributed to the company's natural gas pipelines segment's earnings.
OKE Revenue (TTM) data by YCharts.
ONEOK hasn't returned to increasing its dividend after the pandemic hit the global energy markets. That isn't, however, a bad sign. The company lists both dividend stability and maintaining a strong balance sheet as its top priorities. Additionally, it is looking to invest in high-return projects to boost its growth.
At 5.8%, ONEOK's dividend yield is already one of the highest among the S&P 500 stocks. The company's strategy of prioritizing balance sheet strength and investments in high-return projects over dividend growth thus makes sense. This should benefit shareholders in the long term.
Diversified asset base
ONEOK's steady growth over the years is attributed to the company's strategic and diversified assets in NGL (natural gas liquids)-rich basins. It is the primary pipeline operator in the Williston or Powder River basins and in the Mid-Continent region. ONEOK is also a key natural gas processor in the Williston Basin. The company's pipelines connect NGL production to key market regions.
Demand for natural gas liquids is expected to grow significantly in the coming years. This growth is expected to be driven by increasing demand for ethane and LPG (liquefied petroleum gas). Ethane is a key input in the petrochemicals industry and is used in products such as healthcare, electric vehicles and battery components, and building material. Likewise, there is an increasing demand for LPG for use in home heating and cooking and as a transportation fuel.
As a key player in natural gas and NGL gathering, fractionation, transportation, marketing, and storage, ONEOK is poised to benefit from the growth in demand for these commodities.
Steady fee-based earnings
All three of ONEOK's business segments largely generate fee-based earnings that are not directly tied to the price of commodities. Roughly 90% of the company's 2022 expected earnings from its natural gas liquids segment are fee-based. The segment contributes around 60% to ONEOK's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Likewise, more than 95% of the earnings from its natural gas pipelines segment are expected to be fee-based.
More than 80% of earnings from ONEOK's natural gas gathering and processing operations are fee-based. The contracts in this segment have a POP (percent-of-proceeds) component, which means that ONEOK will retain a percentage of sales proceeds as fees while paying the rest to its producer customers. Yet, this exposure is limited to less than 25% of the segment's earnings. Overall, ONEOK's fee-based contracts allow it to generate a relatively stable cash-flow stream.
A top dividend stock
ONEOK's strategically located assets and fee-based earnings contribute to the stability of its dividend. The long-term demand outlook for both natural gas and NGLs is positive. The stock provides one of the highest yields among the S&P 500 Index stocks. It has grown or held stable its dividend for more than 25 years.
In all, ONEOK looks well-placed to keep generating consistent dividend income in the years to come.
