3 Pipeline Stocks to Buy with Dividends Yielding More than 4%

The pipeline sector has long been an excellent place for income investors because these companies often pay out a large percentage of their cash flow in dividends each year. Because of that, yields tend to be well above average, which is certainly the case with ONEOK (NYSE: OKE), Enbridge (NYSE: ENB), and Phillips 66 Partners (NYSE: PSXP). What's more, these three companies combine a high current yield with a lower risk profile and visible growth opportunities, which makes them excellent stocks for income-focused investors.

The liftoff has already begun

This past February, pipeline and processing giant ONEOK announced that it had agreed to acquire all the outstanding units of its MLP that it didn't already own because the combination would improve its balance sheet while also reducing complexity and costs. Furthermore, the transaction would enable the company to immediately boost its dividend 21% while setting it up to deliver 9% to 11% annual increases from 2018 through 2021, even as it projected to maintain a healthy 1.2 times dividend coverage ratio, which made it a potential gold mine for income seekers.

That deal recently closed, and ONEOK has already made good on its promised post-merger dividend hike and now yields a mouthwatering 5.7%. Meanwhile, future increases will come as the company works through its growing backlog of high-return, fee-based expansion projects. For example, in the STACK play of Oklahoma, the company has recently secured about $355 million of growth projects that should enter service by the end of next year. These projects typically have return multiples of five to seven times adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), so a little capital generates lots of steady cash flow. Given the company's progress in securing projects, it's becoming increasingly likely that ONEOK will deliver on its plan to increase its dividend at a healthy rate for the next several years.

Double digit growth for nearly a decade

Enbridge also recently closed an acquisition, which in its case enabled the company to provide investors with a 15% dividend increase. Because of that, the Canadian energy infrastructure giant currently yields 4.6%. Furthermore, that payout is on rock-solid ground since fee-based contracts underpin more than 95% of its cash flow and the company's payout ratio is in the ultra-conservative 50% to 60% range.

Meanwhile, there's plenty of dividend growth up ahead. In fact, Enbridge currently expects that it can increase its payout by a 10% to 12% compound annual rate all the way through 2024. Fueling that plan is the massive backlog of capital projects it has under construction and in development. In the near term, the company has secured 31 billion Canadian dollars' ($24.4 billion) worth of projects that should enter service through 2020 and deliver 12% to 14% compound annual growth in its available cash flow from operations. In addition to that, the company has several longer-term organic growth projects in development that should enable it to stay on pace with its long-term dividend growth forecast, making it a dream stock for income seekers.

Switching gears but still growing fast

When refining giant Phillips 66 (NYSE: PSX) created Phillips 66 Partners in 2013, its aim was to drop down the bulk of its midstream assets into the MLP over the next five years. That plan would enable Phillips 66 to unlock the value of these assets, while at the same time providing Phillips 66 Partners with cash flowing assets so it could increase its payout by a 30% compound annual rate through 2018.

So far that plan has worked exceptionally well. Overall, Phillips 66 Partners has grown its payout by a 33% compound annual rate while maintaining a conservative payout ratio that has been above 1.24 times over the past year and keeping a solid investment-grade balance sheet. Furthermore, even though the company's units have appreciated nearly 60%, they still yield a generous 5.2% at the moment.

While Phillips 66 is on pace to finish its drop down plan over the next year, that doesn't mean Phillips 66 Partners' growth will dry up. That's because the company has started investing in organic expansion projects, as well as making third-party acquisitions. For example, the company formed a joint venture with Plains All American Pipeline (NYSE: PAA) to expand into the STACK play of Oklahoma. Under the terms of the deal, Phillips 66 Partners contributed $50 million while Plains All American Pipeline provided an existing oil storage terminal and a pipeline. The partners are already expanding the system and pursuing additional growth opportunities. That's just one of several projects it has in development, which when combined with others it secures in the future, should enable the company to continue increasing its payout at a brisk pace in the years to come.

But wait, there's more

These pipeline companies offer excellent current yields backed by a conservative financial profile since all three get more than 90% of their earnings from predictable fees and each has improving leverage ratios that support their investment grade credit ratings. Add to that the fact that all three have clearly visible growth prospects on the horizon, and investors should collect a steadily rising cash flow stream.

However, in addition to all that, these stocks have all dropped in value this year even though the market is riding high. Because of that, investors can pick up even higher yields than they could at the beginning of the year and get an extra helping of upside potential when they recover their lost ground in the future. This blend of value, growth, and income could yield market-beating returns over the long term.

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Matt DiLallo owns shares of Phillips 66. The Motley Fool owns shares of and recommends Enbridge and ONEOK. The Motley Fool has a disclosure policy.