Meet the Little-Known Dividend Growth Stock That Has Skyrocketed 80% Higher Since 2022

Unless you work or invest in energy, you're probably unfamiliar with Williams (NYSE: WMB). Yet, you've likely felt its impact. Its 33,000 miles of pipelines transport a third of the natural gas used in the U.S., which it supplies to utilities to generate electricity and distribute to customers so they can heat their homes.

Williams' gas infrastructure has become increasingly important for fueling the expected surge in electricity demand from catalysts such as AI data centers and electric vehicles. That robust growth driver has powered an 80% surge in its stock price since 2022, nearly double the S&P 500's return. The company's growing gas-driven cash flows have enabled it to steadily increase its dividend.

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A durable dividend stock

Williams has been a highly reliable dividend stock over the decades. The pipeline company has paid dividends for 51 consecutive years. While Williams hasn't increased its dividend every year, it has raised the payout at a 5% compound annual rate since 2020. The company's payout currently yields 3.2%, which is more than double the S&P 500's 1.2% level.

The natural gas infrastructure giant supports its high-yielding dividend with resilient cash flows. The majority of the company's earnings come from assets such as pipelines and processing plants, which generate revenue through either government-regulated rate structures -- pricing set by regulatory bodies to ensure stable returns -- or through long-term, fixed-rate contracts that guarantee set payments over an extended period. This business model helps limit the impact of commodity price volatility.

Williams also backs its dividend with a very conservative financial profile. The company currently generates enough cash to cover its dividend payment by more than 2.3 times, meaning it produces more than double the cash needed for its dividend. That enables it to retain billions of dollars in excess free cash flow each year to fund expansion projects and maintain its strong, investment-grade balance sheet. Williams expects its leverage ratio -- its total debt compared to annual earnings before interest, taxes, depreciation, and amortization (EBITDA) -- to be under 3.7 times this year, a very comfortable level for a company that produces stable cash flow.

The company's stable cash flow and solid financial foundation support its reliable dividend.

The fuel to continue growing its payout

Williams has invested heavily over the years to expand its natural gas infrastructure footprint. The company has completed several organic expansion projects to build additional gas gathering and processing infrastructure and increase the capacity of its large-scale gas transmission pipelines. Additionally, Williams has completed several acquisitions, including buying a major gas storage portfolio for $2 billion early last year and buying the MountainWest gas transmission and storage business for $1.5 billion in early 2023. These investments have helped fuel 9% compound annual funds from operations (FFO) growth since 2020, giving it the growing cash flows to increase its dividend.

The company has a lot more growth ahead. It has a growing backlog of commercially secured expansion projects, with projects currently slated to enter commercial service through the third quarter of 2030, giving it significant visibility into its long-term growth profile. Its projects include multiple pipeline expansions, several gas-fired power plants, and other gas-infrastructure investments.

Meanwhile, it has many more expansion projects in the pipeline. Williams estimates that there are over 30 potential projects to expand its pipeline systems and transport more gas to industrial, power, and LNG facilities in the U.S., representing over $14 billion of future investment potential. The company is also pursuing additional projects to build gas-fired power plants to meet the growing electricity needs of data centers and other customers.

In addition to organic growth, Williams has the financial capacity to continue making strategic acquisitions as opportunities arise. The company most recently acquired Saber Midstream for $160 million and Rimrock Energy Partners for $325 million to bolster its gas infrastructure in two core regions.

Williams' investments in gas infrastructure should enable it to continue growing its FFO at a healthy rate over the coming years, giving it more power to continue increasing its attractive dividend.

High-octane total return potential

Williams has delivered market-crushing returns in recent years, driven by investments that grow its gas infrastructure operations. The company has a significant backlog of expansion projects underway and more in development. These investments support further dividend increases. This combination of income and growth could enable Williams to continue producing high-octane total returns.

Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.