The outlook for stocks in 2025 is positive. But things are changing.
We’ve been spoiled by a booming bull market over the past two years. The S&P 500 posted two consecutive years of better than 20% returns in 2023 and 2024 for the first time in 26 years. More subdued returns are likely in the year ahead.
Things are still pretty good though. The Fed has begun a rate-cutting cycle that will likely last for years into an economy that is solid and expected to get stronger with the policies of the new administration. At the same time, the artificial intelligence boom continues. And the bull market is still very young by historical standards.
But stocks are expensive. The overall price/earnings ratio for the S&P is well above the ten-year average. Then there’s interest rates. Interest rates are likely to stay higher for longer than previously expected as the economy remains strong, and inflation is proving sticky. Investors will have to balance between the benefits of stronger growth and the realization that interest rates probably won’t fall to the degree stocks have already somewhat priced in.
That okay. It’s normal and healthy for a bull market to take a bit of a breather while earnings catch up. And more subdued returns put a greater emphasis on dividends, which provide a greater portion of total return in a flatter market. We tend to forget all about dividends when stocks are flying. But they may play a much bigger role in your overall return in 2025.
One of the best places on the market for dividends is energy stocks. The payouts are among the highest anywhere. And energy is in the spotlight.
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The Trump administration will pursue vastly different energy policies than the outgoing administration. A mainstay of the new economic strategy is to unleash domestic fossil fuel production to its fullest extent. The regulatory environment is likely to become far friendlier and encouraging for more oil and gas activity.
Of course, the policies may not be good for many energy company stocks. More production of oil and gas means lower prices. Lower energy prices mean lower profits for commodity-sensitive companies. But there is one area in the energy realm where the new policy approach is all good, midstream energy.
Midstream energy companies are involved in the middle stages of the energy chain between production and final sale to end users. They gather, process, transport, store, and export oil and gas. A key differentiator is that revenue is primarily generated by collecting fees for such services, and they are not reliant on commodity prices. They are toll collectors on the energy highway that benefit from more oil and gas sloshing around the county, which is a good bet going forward.
The best-positioned midstream companies deal in natural gas, the fastest-growing fossil fuel. Sure, clean energy is the wave of the future. But not for a while. The U.S. currently relies on fossil fuels for 79% of its energy needs. And fossil fuels are expected to remain the dominant energy source for decades to come. Natural gas is the bridge to the future. It is more abundant and cheaper than oil and coal. And it is much cleaner.
Demand for natural gas is strong and getting stronger. It’s the number one fuel source for electricity generation. It’s also the supplement of choice for clean energy, that kicks in when the sun goes in, and the wind stops blowing. The U.S. is the world’s number one producer of natural gas and international demand for exports is strong and growing.
And there’s something else – artificial intelligence. The massive AI catalyst doesn’t just affect high-flying chip companies. Its wake ripples through many aspects of the economy. A major side effect of the new technology is rapidly rising electricity demand.
AI generation sucks up massive amounts of electricity. Data centers (special facilities that house computers and related components) involve sophisticated cooling, back-up, and fire suppression systems. Large data centers require as much electricity as a small town. And that was before AI. Data centers that house AI components require three times as much electricity as a traditional data center.
As a result, electricity demand is expected to skyrocket in the years ahead, beyond what the current grid can provide. There will be capacity expansion. And natural gas is the number one fuel source for electricity generation. The higher demand will require pipelines of natural gas and expansion opportunities for midstream energy companies.
Most midstream energy companies that deal in natural gas had a stellar year in 2024 while the overall energy sector floundered. The good times are likely to continue and get better. These companies also provide high dividend yields. You won’t have to skimp on payout or total return in a likely flatter market in 2025.
Here are two of the best midstream natural gas companies on the market.
2 Midstream Natural Gas Companies for 2025
ONEOK Inc. (OKE)
Yield: 3.9%
ONEOK is a large U.S. midstream energy company specializing in natural gas. It owns one of the nation’s premier natural gas liquids (NGLs) systems connecting NGL supply in the Rocky Mountains, Midcontinent, and Permian regions in key market centers, and has an extensive network of natural gas gathering, processing, storage, and transportation assets.
Here are some things to like about the stock.
• Investment-grade rated debt
• 85% of earnings are fee-based
• 28 years of stable and growing dividends
• C corporation structure (generates a 1099, not a K-1)
The high-yielding and reliable revenue generator provided a 48.5% total return in 2024 and a 100% return over the last three years. There should be good times ahead as well. ONEOKE recently acquired two midstream companies, Enlink Midstream (ENLC) and Medallion Midstream, which are accretive to earnings immediately. The growing earnings combined with highly favorable industry dynamics should make OKE a winner in 2025.
The Williams Companies Inc. (WMB)
Yield: 3.4%
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 William’s 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.
The company continues to raise future earnings guidance as business is booming. WMB also had a stellar 2024 as investors anticipate the growth in natural gas. It returned a whopping 59% for the year. But WMB still trades below the all-time high in 2014 with much higher earnings now.
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