Dear Investor,

Every December, I publish my conservative stock pick for the new year, as well as a more aggressive stock pick. Today, I’m sharing my conservative stock, ONEOK, Inc. (OKE). I see ONEOK as the highest quality company and stock in the energy midstream sector.

ONEOK is an energy infrastructure company strictly focused on natural gas and NGLs. From the company’s website:

ONEOK (pronounced one-oak) is one of the largest energy midstream service providers in the U.S., connecting prolific supply basins with key market centers. It owns and operates one of the nation’s premier natural gas liquids (NGL) systems and is a leader in the gathering, processing, storage and transportation of natural gas. ONEOK’s operations include a 38,000-mile integrated network of NGL and natural gas pipelines, processing plants, fractionators and storage facilities in the Mid-Continent, Williston, Permian and Rocky Mountain regions.

Here is a map of ONEOK’s pipeline network:

An Evolving Company

Until the middle of 2017, ONEOK primarily owned the general partner interests in its controlled MLP, ONEOK Partners LP. The companies operated like a traditional energy infrastructure setup, with the MLP owning the bulk of the assets. The energy commodity bear market of 2015-2016 forced many MLP companies to find ways to reduce expenses. Quite a few have gone through “simplification” processes, where either the MLP or the general partner absorbed the assets and partnership rights of the other. The ONEOK companies elected to merge the MLP into the corporate general partner. The merger was completed on June 30, 2017. I have analyzed many of these simplification events, and the ONEOK move has been one of the most successful from an investor’s point of view.

ONEOK is a classic dividend growth stock. From 2000 through 2020, the OKE dividend grew by a 14% annual compound growth rate. Dividend growth, plus an attractive dividend yield, provides one of the most reliable paths to great long-term total returns.

However, throughout the pandemic, ONEOK stopped increasing the dividend. The company went from a payout boost every quarter to no dividend increases since January 2020. That being said, unlike many midstream companies, ONEOK did not cut its dividend in the early days of the pandemic.

ONEOK results and profits have grown over the last two years. For 2020, EBITDA increased over 2019 by 6%, to $2.724 billion. In early 2021, the company forecasted 2021 EBITDA of $3.05 billion. Now, as we get ready to close out 2021, the full-year guidance has climbed to $3.325 billion to $3.425 billion. The midpoint provides 24% profit growth over 2020.

Think about that.

ONEOK EBITDA grew by 30% through the pandemic, and the company has not increased the dividend for the two years. I am confident the company will return to a dividend growth profile in 2022, possibly with a substantial dividend increase when the next payout is declared in January.

OKE currently yields 6.4%. Couple that yield with significant dividend growth in 2022, and you have a stock set up for great total returns next year.Stay tuned for the Wednesday issue of Market Cap, where I’ll share my pick for a more aggressive dividend stock for 2022. And if you want more low-risk, high-yield dividend stocks, click here to see how to get access to my full portfolio.