Exploring High-Yield Opportunities in the Energy Sector
The S&P 500 offers a modest yield of only 1.3%. This is largely due to the growing influence of growth companies, which typically do not provide dividends or have lower yields. For retirees or anyone seeking regular income, it may be essential to consider other investments for better returns.
The energy sector could be a promising option, striking a balance between attractive yields and solid value. Many oil and gas companies actively reward shareholders with dividends while maintaining reasonable valuations.
Let’s take a closer look at why Phillips 66 (NYSE: PSX), Chord Energy (NASDAQ: CHRD), and the Global X MLP ETF (NYSEMKT: MLPA) are strong contenders for income-focused investors.
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Daniel Foelber (Phillips 66): On October 29, Phillips 66 revealed its earnings for the third quarter of 2024. The company reported earnings per share of $0.82, though the adjusted figure was a more promising $2.04.
Corporations often adjust earnings to exclude non-recurring costs that don’t reflect their ongoing operations. Phillips 66 indicated a substantial $605 million in legal expenses linked to ongoing litigation. Recently, a California jury found in favor of Propel Fuels Inc., ordering Phillips 66 to pay almost $605 million for allegedly misusing confidential information and trade secrets.
This legal setback has impacted Phillips 66’s financial standing and public image. Despite these challenges, the company is making strategic moves to reduce debt and improve cost effectiveness, such as selling assets in Switzerland and closing a poorly performing refinery near Los Angeles.
Additionally, they recently completed a $3.8 billion acquisition of DCP Midstream and achieved a remarkable $400 million in cost savings. Overall, Phillips 66 anticipates saving $1.4 billion, which will bolster profitability even during periods of lower refining margins.
With this stock now at a yearly low, the dividend yield has risen to an appealing 3.8%, making it an attractive option for investors seeking passive income.
Since July 2022, Phillips 66 has returned $12.5 billion to shareholders through buybacks and dividends, aiming for a target of $13 to $15 billion by the end of the year. Moving forward, the company plans to allocate around 50% of its operating cash flow to shareholders.
Overall, while current results may seem disappointing, Phillips 66 is enhancing the quality of its portfolio, presenting a potential buying opportunity for investors interested in increasing their income streams.
Chord Energy: A Harmonious Dividend Play
Scott Levine (Chord Energy): While some dividend-paying oil stocks are well-known, Chord Energy is a noteworthy name that is gaining attention. With a forward yield of 9.1%, Chord Energy operates in the upstream segment of the energy market, focusing on oil, natural gas, and natural gas liquids.
The company’s upstream assets in the Williston Basin generate significant revenue, with oil accounting for approximately 96% of overall revenues, as per their second-quarter 2024 results. Chord Energy has consistently produced free cash flow averaging about $1 billion yearly over the last three years, placing it ahead of peers like Coterra Energy, Marathon Oil, Ovintiv, and Permian Resources in terms of free cash flow yield.
CHRD Free Cash Flow Yield data by YCharts.
Looking ahead, management expects robust free cash flow. If the price of West Texas Intermediate oil averages $70 per barrel in 2024, they predict a free cash flow yield of 9%, which could rise to 12% if prices hit $80.
The company’s dividend strategy also reflects caution. If Chord Energy’s net debt surpasses its earnings before interest, taxes, depreciation, and amortization (EBITDA), they will maintain a base dividend. If the net debt drops below this ratio, they will distribute a base dividend plus 50% of free cash flow, with even higher returns at lower leverage ratios.
For income investors seeking exposure to energy, Chord Energy offers an appealing route.
Global X MLP ETF: A Safer Bet in Energy Infrastructure
Lee Samaha (Global X MLP ETF): Adjusting to new market realities requires rethinking investment strategies, particularly in midstream pipelines and storage avenue stocks. While the clean energy transition is indeed coming, it will likely take longer than expected, leaving natural gas as a critical player in both U.S. and worldwide energy supply for many years.
Without adjusting for inflation and discount rates, this ETF’s current quarterly distribution of $0.90 would require slightly over 13 years to equal the total dividends of your initial investment.
This possibility, while uncertain, highlights the ongoing need for consistent, reliable energy sources such as natural gas to stabilize prices.
Investing in this ETF can help mitigate risks linked to individual midstream pipeline stocks. It currently includes 20 master limited partnership (MLP) stocks—unique since they don’t pay corporate taxes, allowing them to distribute higher dividends. With a low expense ratio of just 0.45%, this ETF presents an economical way to gain exposure to this promising high-yield sector.
Seize the Opportunity Before It’s Too Late
Do you ever feel like you’ve missed key chances to invest in top-performing stocks? There may still be opportunities available.
Occasionally, our team highlights a “Double Down” stock recommendation for companies on the verge of significant growth. If you think you have missed your chance, this could be the prime moment to invest before it’s too late. Consider some previous examples:
- Amazon: A $1,000 investment in 2010 would be worth $22,469 today!*
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We’re currently issuing “Double Down” alerts for three extraordinary companies, and this might be your last chance to invest smartly.
See 3 “Double Down” stocks »
*Stock Advisor returns as of November 4, 2024
Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in any of the stocks mentioned. Scott Levine 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.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
