3 Attractive Income Stocks Whose Dividends Could Double

By Matthew DiLallo Markets Fool.com

Continue Reading Below

Image source: Getty Images.

A company that pays a meager dividend does not need to exert much effort to double its payout in a short amount of time. What is much harder to accomplish is delivering significant income growth from the higher base of an already attractive payout. That said, it is not impossible to find these rare gems. In fact, I have uncovered three companies that clearly have the capacity to double their generous dividends over the next few years.

Zeroing in on the target

Natural gas pipeline giant Kinder Morgan (NYSE: KMI) currently pays investors a decent 2.4% yield, which is well above the market's average rate of 2%. The company's payout used to be even more generous, but it chose to reduce the dividend by 75% at the end of 2015. It did so to alleviate concerns about its ability to finance growth projects given the amount of debt weighing down its balance sheet. It diverted a significant portion of the cash it had been paying investors toward funding growth projects and paying down debt.

As a result of these and other actions, Kinder Morgan's leverage ratio has come down from the peak. The company, however, still has more work to dogiven the projection that its leverage ratio will end 2017 at 5.4 times debt to EBITDA, which is above its 5.0 times target level. As things stand right now, Kinder Morgan should reach that ideal leverage ratio by the middle of 2018 thanks to the completion of several major projects. Once that happens, it can redirect its growing stream of cash flow toward the dividend, which many analysts believe will increase by 100% in 2018.

Continue Reading Below

Getting over the hump

Midstream general partner Williams Companies (NYSE: WMB) also chose to reduce its dividend so it could redirect that cash toward growth projects. In Williams' case, though,it did so to supportthe growth of its master limited partnership,William Partners (NYSE: WPZ). Williams expects that support to last until 2018 when both companies should be in the position to restart dividend growth. In fact, at least one analyst expects Williams to rebase its dividend by 150% in 2018.

That said, the largest project in the pipeline -- the $3.1 billion Atlantic Sunrise Pipeline -- recently hit a snag and will not enter full service until the middle of 2018. That delay could stall the restart of Williams' dividend growth or mute growth until the project begins full service. Still, investors can collect an attractive 2.6% yield as they await a potentially generous pay raise in a couple of years.

Image source: Getty Images.

A little longer wait

Canadian oil pipeline giant Enbridge (NYSE: ENB) does not offer investors the same catalyst of a potential 100% dividend increase as soon as 2018. Instead, what the company does provide is a higher yield now, lately around 3.7%, with the likelihood of double-digit annual increases for the next several years. In fact, Enbridge anticipates increasing the payout 15% in 2017, while delivering 10% to 12% annual growth through 2024 as it works through the largest project backlog in the energy infrastructure sector.

To put those numbers into perspective, if Enbridge grows its payout by 15% this year and 12% annually after that, it will double the dividend in just five years. Meanwhile, a lower-end growth rate of 10% annually would only add one year to that timeline. Needless to say, long-term Enbridge investors could collect a considerable amount of dividend income over the next several years.

Investor takeaway

Investors who are looking for an attractive income stream with the potential to grow even more lucrative have several compelling options. Both Kinder Morgan and Williams appear poised to return their dividends to more lofty levels after completing major expansion projects in the next year. Enbridge, on the other hand, has a steady stream of projects scheduled to come on line over the next few years, which could result in its dividend doubling in as little as five years. Suffice it to say, investors in these pipeline stocks can expect to see much bigger paydays in the future.

10 stocks we like better than Williams Companies
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Williams Companies wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of Nov. 7, 2016

Matt DiLallo owns shares of Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan and long January 2018 $30 calls on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.