3 Scorching Hot Dividend Stocks -- Are They Buys?

By Matthew DiLallo Markets Fool.com

Some investors think dividend stocks are boring. Fueling that view is the misconception that dividend-paying stocks don't offer the exciting growth found in their stingier peers. However, in the case of these dividend stocks, that view couldn't be any farther from the truth.

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Consider the case of midstream general partnerships over the past year. Williams Companies (NYSE: WMB) and ONEOK (NYSE: OKE) have both doubled, while Energy Transfer Equity (NYSE: ETE) has nearly tripled. While those scorching hot returns are partially due to their recovery from a deep sell-off in early 2016, these dividend stocks look like to have plenty left in the tank.

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Repositioned and ready to grow

One of the reasons Williams Companies' stock crumbled in early 2016 was concerns about its pending merger with Energy Transfer Equity. The market feared that the incremental debt needed to facilitate that deal could cause both companies to implode because of the worsening oil market downturn. Luckily, Energy Transfer Equity found a way out and the deal unraveled, which sent both stocks soaring over the next few months as they unveiled standalone go-forward strategies.

In Williams' case, it worked to shed commodity-price-sensitive assets at its MLP,Williams Partners (NYSE: WPZ), which shored up its balance sheets and further stabilized future cash flow. In addition, both companies completed a financial repositioning to simplify their structure, enhance their credit profile, and increase distribution coverage. As a result, Williams Partners has the capital it needs to finance its growth project backlog, enabling it to deliver 5% to 7% annual distribution growth over the next several years. That positions Williams Companies to guide for 10% to 15% annual dividend growth over that same timeframe while maintaining at least 1.1 times dividend coverage, which is robust growth for a stock that currently yields more than 4%.

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Consolidating its way to a better tomorrow

ONEOK's stock is also coming off a turbulent year. After getting slammed by market fears earlier last year, the company has recovered quite nicely. One of the drivers of that recovery has been a focus by its MLP,ONEOK Partners (NYSE: OKS), to restructure commodity-price exposed contracts. As a result, stable fees will supply 90% of its earning this year, up from just 66% in 2014.

In addition, ONEOK recently sealed a deal to gobble up ONEOK Partners and consolidate under one corporate umbrella. As a result, ONEOK expects to boost its dividend 21% once the deal closes and by 9% to 11% annually through 2021 while maintaining at least 1.2 times dividend coverage. That's a generous growth rate for a company that currently yields 4.4%.

Image source: Getty Images.

Still sorting things out

Energy Transfer Equity's decision to walk away from the Williams Companies deal ignited its scorching-hot run over the past year. However, it added fuel to that fire by working with its various MLPs to get them back on solid ground. These moves included providing direct support to its namesake MLP,Energy Transfer Partners (NYSE: ETP), and its fuel distribution subsidiary,Sunoco LP (NYSE: SUN), by injecting capital into both entities to give them some more breathing room.

Meanwhile, those MLPs have announced additional moves to shore up their financial situation. Energy Transfer Partners, for example, is merging with another Energy Transfer Equity MLP, which will improve its leverage ratio and enhance distribution coverage. Meanwhile, Sunoco LP recently announced a $3.3 billion deal to unload the bulk of its gas stations, giving it cash to pay down debt.

With its MLPs getting back on solid ground, it makes it less likely that Energy Transfer Equity will need to cut its generous 6% payout. Meanwhile, with the double-digit annual distribution growth projected at Energy Transfer Partners, there's a growing likelihood that Energy Transfer Equity might be in the position to restart distribution growth in the future.

Investor takeaway

Despite doubling over the past year, both Williams Companies and ONEOK expect to deliver double-digit dividend growth over the next few years. Those forecasts suggest that there's more upside ahead, making both compelling buys. Energy Transfer Equity, on the other hand, isn't quite there yet because it still needs to sort some things out. While that uncertainty and the fact that the stock has tripled over the past year make it a less compelling buy right now, it's hard to pass up a 6% yield that's becoming less risky with each move it makes.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of and recommends ONEOK. The Motley Fool recommends ONEOK Partners. The Motley Fool has a disclosure policy.