Energy is a good place to look for returns.
Six of the top 11 stocks with the highest dividends within the
S&P 500 Index
belong to the energy group, according to data from S&P Dow Jones Indices. The returns on those half-dozen companies range from 5.4% to 7%.
The entire sector yields about 4% based on the
Energy Select Sector SPDR
(ticker XLE) exchange-traded fund, which holds energy stocks in the S&P 500. The total index returns less than 2%.
Half a dozen high-efficiency energy companies are led by pipeline operators
(RMI). All three are structured as corporations, meaning investors get 1099 tax forms and not the much hated K-1 forms issued by pipeline operators structured as limited partnerships.
The other three are top independent refineries
(VLO) and energy giants
With energy prices strong, dividends certainly look like Exxon Mobil and Chevron and the pipeline companies have ample coverage of their payouts as well.
|Company / Ticker||Recent price||YTD Change||Dividend Yield|
|Ok / OK||$53.27||38.8%||7.0%|
|Williams Cos. / WMB||25.32||26.3||6.5|
|Kinder Morgan / RMI||17.54||28.3||6.1|
|Valero Energy / VLO||63.71||12.6||6.0|
|Exxon Mobil / XOM||57.35||39.1||6.0|
|Chevron / CVX||99.23||17.5||5.4|
Sources: S&P Dow Jones Indices; Bloomberg
Oneok, whose stock trades around $53, returns 7%. It is a leading transporter of natural gas liquids and operates natural gas pipelines. The company comfortably covered its first quarter dividend from its distributable cash flow, a common financial metric for pipeline companies.
Based on the 2021 financial outlook, dividend coverage looks solid for the rest of the year. Oneok has had 25 years of dividend stability and growth, with dividends being paid 6% in 2020 compared to 2019.
Kinder Morgan, the largest energy infrastructure company in the S&P 500 index, is trading at around $17.50, yielding 6.1%. Kinder Morgan expects distributable cash flow for 2021 to exceed the dividend by approximately $2 billion. The company increased its payout by 3% earlier this year.
Williams operates major natural gas pipelines, including the crucial Transco artery connecting the Gulf Coast to the Northeast. It handles 30% of the country’s natural gas. The shares, around $26, are yielding 6.5%. The company expects to cover its dividend and all of its capital expenditures from 2021 distributable cash flow with approximately $250 million in free cash flow left over.
Exxon Mobil’s dividend, which looked fragile in 2020, is getting safer thanks to higher energy prices and cuts in capital spending. The stock, recently around $57, is yielding 6%.
Devin McDermott of Morgan Stanley expects the company to cover its dividend by an average of 100% through 2025. He has an Overweight rating and a price target of $84 for the stock.
Chevron has the strongest balance sheet among the global supermajors and ample cash flow. That supports the 5.4% dividend. McDermott also favors Chevron, whose shares recently traded around $99. He has an Overweight rating and a price target of $149.
“CVX offers industry-leading cash flow, anchored by low-risk investments, a differentiated value proposition in the industry, especially in the current uncertain macro backdrop,” McDermott wrote. He appreciates the company’s strong position in the Permian Basin.
Shares of Valero, a large independent refiner with a strong presence on the Gulf Coast, have been hit recently as refining spreads narrowed and second-quarter and second-year earnings estimates fell. The company will report its second quarter results on Thursday.
Valero, at a recent $64, is down about 25% from its near $85 high in early June. The share yields 6%. The projected second-quarter profit of 14 cents is well behind the quarterly payout of 98 cents.
“The main risk remains the pace of the refining recovery, which could force the company to lean on its balance sheet to fund the dividend in the near term,” JP Morgan analyst Phil Gresh recently wrote. He remains optimistic about Valero, citing its valuable refining footprint and growing renewable diesel business. He has an Overweight rating and a price target of $83.
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