If one benefit to the oil slowdown and energy crash stands out, it’s that yields on energy stocks have now reached historical highs.
Want proof? Check out the 3.6% yield on the sector proxy — the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE). A few years ago, the XLE was barely cracking 1% in terms of dividend yield.
That puts many energy stocks on par with many other traditional dividend sectors.
While that current high yield is of little consolation to long-suffering shareholders in many of these firms, for investors just now looking for income opportunities, the sector is ripe for the picking.
Oil prices seem to be stabilizing and many energy stocks have already taken the painful — but necessary — step to cut payouts. Those who haven’t have perhaps already gone through the worst of it. The dividends on many energy stocks are essentially “safer” than they were before.
With that in mind, those investors looking for income may want to consider adding a few of the better yielding firms to their portfolio, starting with these seven:
Dividend-Paying Energy Stocks: TransCanada Corporation (USA) (TRP)
Dividend Yield: 3.7%
For years, the name TransCanada Corporation (USA) (NYSE:TRP) was synonymous with the Keystone XL and everything that entailed. That famed project — which was ultimately gutted — became a legal and PR nightmare that sat in limbo for over six years. Investors seem to forget that the firm is one of the largest midstream/pipeline operators in North America and shares of TRP stock only traded on any Keystone news.
But, this is now and that was then. And it’s a whole different ball of wax at TransCanada.
For starters, TRP has buried the expansion project: The KXL is dead. So that albatross is now removed from the energy firm’s neck.
Replacing it is a torrent of growth options that will be even bigger for TransCanada’s bottom line. The firm has bought out Columbia Pipeline Group. That gives thousands of miles worth of critical intrastate natural gas lines in the Northeast. The kind of lines that fuel utilities and feature steady cash flows. TransCanada also has recently unveiled new plans to ship gasoline and other refined fuels into Mexico — the largest importer of U.S. fuels.
These moves will continue to strengthen TRP’s rich 3.72% dividend yield with steady cash flows for years to come.
Dividend-Paying Energy Stocks: Valero Energy Corporation (VLO)
Dividend Yield: 4.5%
For refining giant Valero Energy Corporation (NYSE:VLO), things haven’t been going so good, what with the energy slowdown weighing on profits. As oil prices fell, refiners were realizing some of the best crack spreads/margins in history. So they pushed more and more fuel through their systems. So much so, that we now have a gasoline glut. Whoops.
For VLO, that meant that its profits sank a whopping 38% on the lower margins. It also caused a nasty drop in its share price. But that doesn’t mean that VLO should be sold away. It really means it should bought with two fists.
Sure, margins have sank recently, but Valero is the largest independent refiner. That includes over 15 different refineries. That large scale means that Valero can pump out additional efficiencies better than its rivals. And it did. Last quarter, costs sank tremendously. Meanwhile, the firm still was very profitably — just not insanely profitable. That allowed VLO to end the quarter with more than $4.9 billion in cash on its books.
This continued strong cash flow generation means that VLO’s juicy 4.5% yield is very much here to stay. And it could even grow it further as its efficacy improvements bear fruit when spreads return.
Dividend-Paying Energy Stocks: Occidental Petroleum Corporation (OXY)
Dividend Yield: 4.1%
Like many energy stocks, mini-major Occidental Petroleum Corporation (NYSE:OXY) has struggled under the weight of lower oil prices. OXY does, however, have a few tricks up its sleeve.
For one, its production takes place in some of the cheapest places on the planet. In the U.S., OXY is a huge producer in the low-cost Permian, while overseas, the company has some major legacy assets in Qatar, Oman and the United Arab Emirates. All of these fields create a much lower cost of production profile for the mini-major than, say, a high-flying shale driller.
OXY also benefits from its refining arm. While the refining sector is now suffering, OXY’s secret weapon is that it doesn’t make gasoline — it produces higher-margin chemicals. OxyChem is one of the largest manufacturers of chlor-alkali products and vinyl. That’s a different set of end-users than people taking trips to the beach.
The combination of these two factors have helped OXY report lower losses than its rivals. Meanwhile, it operating cash flows have still been good and the firm’s cash balance grew last quarter.
At the end of the day, OXY’s 4.13% dividend will still be there for investors when oil finally rebounds.
Dividend-Paying Energy Stocks: ConocoPhillips (COP)
Dividend Yield: 3.67%
Several energy stocks took their lumps early in the game and cut their dividends long before it became a monster problem. One of those firms was the venerable ConocoPhillips (NYSE:COP).
COP isn’t exactly out of the woods yet, however. Recent losses and cash flow lows have continued to hurt its position. Meanwhile, debt has gone up to fund its capex program.
So why buy it for the dividend? Well, the key is stabilizing oil prices. With oil hovering in the mid-$40’s, Conoco should now be closer to cash flow neutral. Basically, operating cash flows will pay for the energy firm to drill. Additionally, COP has continued to drop capex expenses over the course of the year. With management pledging that it can fund drilling and pay a dividend at $45 per barrel oil, COP’s 3.67% payout could last the current downturn.
The risk is that oil drops even further. At that point, it would be back to the drawing board for investors and COP’s dividend yield.
It isn’t the safest dividend when looking at energy stocks, but for bold investors, the combination of a high yield and potential long-term capital appreciation could make COP a great total return play.
Dividend-Paying Energy Stocks: Suncor Energy Inc. (USA) (SU)
Dividend Yield: 3.2%
Energy stocks in Canada are becoming quite juicy for income seekers. And the “King of the Canucks” may just be Suncor Energy Inc. (USA) (NYSE:SU).
SU is already the biggest and baddest firm in the Canada’s oil sands. The firm basically created the process needed to extract fuel in the region. Since then, Suncor has expanded and is now one of the largest owners of acreage in the region. It leads in terms of production as well. But while that production side has suffered — Western Canadian Select trades at huge discounts — its other businesses have hummed along.
Suncor is also one of Canada’s largest refiners. The firms crack-spreads still remain juicy thanks to the larger discount on WSC crude. That’s helped bolster cash flows. And Suncor collected nearly a $1 billion in cash this past quarter.
SU has used that cash smartly by paying down debt and buying out smaller rivals to enhance its position in the oil sands. Ultimately, that will keep the good times coming over the long haul. It’ll also help keep the cash flowing to SU’s rich and growing 3.2% dividend yield.
When it comes to energy stocks, SU could be one of the strongest to buy.
Dividend-Paying Energy Stocks: Exxon Mobil Corporation (XOM)
Dividend Yield: 3.4%
The last few quarters for giant Exxon Mobil Corporation (NYSE:XOM) have been downright abysmal. We’ve seen some of the worst quarterly profit drops in the company’s storied history. That’s certainly troubling and should be enough to make investors pause.
But afterward, they should consider buying the king of energy stocks. That strong 3.4% dividend yield isn’t going anywhere.
The truth is, as the largest energy firm, XOM has a ton of levers to pull to keep that payout humming along. Aside from the fact that it still making money in the this environment — albeit, not as much — its massive treasury stock balance, ability to raise cheap debt and still-strong cash flows will keep its dividend intact for quite a while.
Meanwhile, Exxon’s continued focus on natural gas is starting to pay benefits. Natural gas prices have finally begun to move up as utilities — both here and abroad — have embraced the fuel. For XOM, that’s great news and will only help its major investments in natural gas production and LNG pay off.
For investors, the payoff is one of the best dividend yields in the sector.
Dividend-Paying Energy Stocks: Magellan Midstream Partners, L.P. (MMP)
Dividend Yield: 4.68%
When it comes to energy stocks, sometimes boring could be the best way to go. And Magellan Midstream Partners, L.P. (NYSE:MMP) is pretty darn boring — at least when looking at its core businesses.
MMP moves crude oil. A lot of crude oil. Magellan’s 9,600 miles worth of pipelines and storage facilitates makes up the largest refined petroleum products pipeline system in the country. Nearly 50% of the nation’s total refining capacity — either going in or coming out — can tap into one of MMP’s lines, terminals or storage farms. It’s very boring — with the vast bulk of its system realizing steady, fee-based cash flows.
And it’s used those cash flows to fund its growth.
Management at MMP have focused on “organic growth” and avoided debt like the plague. That’s done nothing but strengthen Magellan even further during this downturn. As rivals suffer, MMP continues to thrive. It hasn’t had to worry about keeping the lights on or worry about commodity prices for that matter.
Investors haven’t had to worry either. The MLP has managed to increase its dividends more than 525% since its spin off from Williams Companies Inc (NYSE:WMB) back in 2004. Going forward, MMP is still as strong as ever.
As of this writing, Aaron Levitt was long MMP stock.