Guest Contribution by Tom Hutchinson, Chief Analyst, Cabot Income Advisor
We are still in the early stages of a bull market. The tariff issues will fade. The Fed will start cutting rates. Inflation is subdued, and the economy is nowhere near recession.
However, the near-term direction is more unpredictable than usual.
The current situation calls for a certain kind of stock that can thrive in almost any market environment. If the market takes off, it can participate. If the market goes flat, it can generate positive returns.
And if the market turns south, it can yield superior relative returns.
A good choice in this environment is a midstream energy company. These companies don’t rely on volatile commodity prices, but rather generate fees from the transport, storing, and processing of oil and gas. Demand should be resilient, especially for natural gas, and the high dividends provide a great buffer.
Energy stocks like this are typically a good source of dividends. With this in mind, Sure Dividend created a list of nearly 80 dividend-paying energy stocks.
You can download a free copy of the energy stocks list by clicking on the link below:
Historically, the better midstream energy stocks have provided a high income and a solid return throughout most market cycles. And that makes them ideal for the current unpredictable environment.
Natural gas is in high and growing demand in the U.S. and overseas. It is by far the cleanest burning fossil fuel and increasingly seen as a bridge between now and a clean energy future, even by some of the biggest clean energy advocates.
U.S. natural gas exports are likely to grow strongly in the years ahead. The U.S. is the world’s largest producer of natural gas and currently the second largest exporter.
Demand for exports is growing as Europe seeks alternatives to Russian gas and Asian economies are fast-growing. The new administration is highly encouraging more gas production and increasing natural gas exports.
You can’t build pipelines across the oceans. Natural gas liquid (NGL) export facilities had to be built that convert gas to liquid form and ship it on tankers overseas. The first U.S. facility was completed in 2016 and many more are coming online. Companies connected to this growing business will have growth opportunities.
There is also electricity. AI is a technology that requires massive amounts of electricity. Data centers, specialized facilities that house computing components, often require as much electricity as a small town. But that was before AI. AI components require seven times as much electricity as a regular data center.
Trillions are expected to be invested in these AI data centers in the coming years.
As a result, electricity demand is skyrocketing after being stagnant for decades. Utilities are scrambling to add capacity, and natural gas is the number one source of electricity generation. There are enormous growth opportunities in providing additional gas to these utilities. Natural gas has become part of the AI trade.
The Williams Companies Inc. (WMB)
The U.S. has more natural gas than it can use, and other parts of the world are desperate for the stuff. Massive natural gas export facilities have been built in recent years that liquify gas and ship it overseas, and many more are under construction.
The new administration is highly encouraging NGL liquid exports. The government policy is to increase oil and gas production and reduce regulatory burdens. That’s not necessarily a good thing for the price of many energy stocks that rely on commodity prices. However, midstream energy companies benefit from volumes and should benefit as more oil and gas sloshes around the country.
Williams is involved in the transmission, gathering, processing, and storage of natural gas. It operates the large Transco and Northwest pipeline systems that transport gas to densely populated areas from the Gulf to the East Coast. Roughly 30% of the natural gas in the U.S. moves through Williams’ systems.
Like most other midstream energy companies, the overwhelming bulk of earnings are guaranteed by long-term contracts. And those contracts have automatic inflation adjustments built in.
It also operates a near monopoly in its areas and doesn’t have to compete in price with other similar companies. As a large and established player, it can easily grow with network expansion.
That’s a big deal. It takes a lot of time and resources to start a new pipeline and get the necessary approvals. It’s infinitely easier and cheaper to just add more capacity to an existing facility. A company like Williams has these expansions down to a science and can crank them out quickly and at low cost and easily secure new contracts.
The company has a large and well-positioned pipeline system that allows it to invest in high-return growth projects with minimal regulatory hurdles. It has made several structural and financial moves in recent years that should allow the company to maintain and grow its dividend.
William is connected to the fastest-growing natural gas-producing regions in the country. It is also well-connected to export facilities on the Gulf and major utilities in the country.
The recent stock performance confirms the strong position of the company. In the last three calendar years, WMB has returned 128% compared to a return of just 28% for the S&P 500 over the same period.
It’s also up over 8% YTD compared to 7% for the S&P. These returns happened with far less volatility than the overall market. Even in the tumultuous market of this past April, WMB was down less than 2% for the month.
Williams currently pays a dividend of $2.00 per share annually, which translates to a solid 3.5% yield at the current price. WMB has also increased the payout for the last nine consecutive years.
The future looks bright. Williams has a strong and growing presence in the fastest-growing fossil fuel source. Even in recent hard times for the industry, natural gas volumes continued to grow at the company. NGL exports are likely to dramatically increase in the years ahead, along with U.S. natural gas production.
In the most recent quarter, Williams delivered another solid earnings report with earnings per share up 8% and cash flow from operations going up 16% over last year’s quarter. The company also raised guidance for 2025 as project expansions come online.
WMB is a reliable, dividend-paying stock with strong industry fundamentals going forward.
Additional Reading
The following databases of stocks contain stocks with very long dividend or corporate histories, ripe for selection for dividend growth investors.
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