Higher-yielding dividend stocks tend to be slower-growing companies. They often pay out a significant percentage of their cash flow in dividends because they don't have enough attractive growth opportunities to reinvest that cash. Their slower growth also weighs on their valuations, which causes their dividend yields to rise.
Pipeline companies have fit that description in recent years as their growth has slowed. However, the industry is seeing a resurgence in demand. Because of that, several pipeline stocks are stomping on the gas by ramping up their investment rates, which should fuel faster growth in the coming years. And that re-acceleration could enable them to grow their high-yielding dividends even faster in the future.
Adding $5 billion, with more to come
Natural gas pipeline giant Kinder Morgan (KMI 2.20%) has been running on fumes in recent years. The company's growth engine had stalled out, causing its dividend yield to rise. At recent prices, it yielded about 4.2%, which was several times higher than the S&P 500's 1.3% yield.
NYSE: KMI
Key Data Points
However, several catalysts -- including the onshoring of manufacturing, the world's growing reliance on electrical energy, and the boom in data centers -- are fueling a resurgence in power demand. That's driving a surge in demand for more natural gas pipeline capacity. Kinder Morgan has recently added $5 billion of new large-scale natural gas pipeline projects that it expects to complete through the end of the decade. As a result, its backlog has ballooned to $8.1 billion, a 60% increase over the past quarter. Its backlog is several times higher than a few years ago ($3 billion at the end of 2023 and $1.4 billion at the end of 2021).
The company believes those investments will drive earnings growth for years to come. That should give it more fuel to grow its dividend, which it has been increasing at a rather modest 2% annual rate in recent years. Dividend growth could start accelerating in 2027 when the first of its three major gas pipeline projects enters commercial service.
Those projects are only the beginning. "As we look to the future, we continue to see additional growth opportunities in natural gas between LNG exports to Mexico power and industrial growth," CEO Kim Dang said on the company's fourth-quarter earnings call.
Dang added, "Our internal number for growth in the overall natural gas business is roughly 28 Bcf [billion cubic feet] a day of growth between now and 2030." That's a significant amount of incremental demand, considering that U.S. gas consumption was 110 billion cubic feet per day last year.
Securing another $1.6 billion gas-powered project
Fellow natural gas pipeline operator Williams (WMB 2.99%) also offers a higher dividend yield (recently 3.5%). It has been growing its payout a little bit faster than Kinder Morgan (about 5% annually over the past five years) thanks to the growth of its Transco pipeline.
NYSE: WMB
Key Data Points
Williams is also seeing an acceleration in gas demand, which is allowing it to approve more expansion projects. The company recently announced an agreement to provide onsite natural gas and power generation infrastructure for an unnamed customer. It will invest $1.6 billion into the project, which should start service in the second half of next year. It's Williams' first power innovation project to supply natural gas-fired power directly to a customer.
This project will cause Williams to boost its 2025 growth capital project budget by $925 million to a range of $2.6 billion to $2.9 billion. That's up from $1.5 billion last year. The company currently has projects in the backlog that should enter service through the end of the decade. Meanwhile, it has another 30 potential projects under development, representing $11.8 billion of investment potential through 2032. Securing those and other projects would give Williams even more fuel to continue increasing its high yielding dividend.
High-powered growth ahead
Natural gas demand is in the midst of a resurgence. That's fueling accelerating growth for gas pipeline companies like Kinder Morgan and Williams. Because of that, they should be able to grow their higher-yielding dividends even faster in the future, setting investors up to potentially earn some high-octane total returns.
