Recent drops in oil prices have created an opportunity for investors to snap up high-yield energy stocks at discounted rates. One key player, Phillips 66 (PSX), stands out with a substantial “hidden” yield of 10.3%.
Understanding the Current Oil Landscape
Last week’s decline in oil prices stems from a slight easing of tensions in the Middle East. However, it’s important to note that conditions can shift rapidly, impacting prices once again. What’s compelling is that this price drop coincides with a substantial decrease in natural gas prices since October, while energy demand is projected to increase.
Notably, major technology companies are actively seeking energy sources, with Microsoft’s recent agreement with Constellation Energy to restart a nuclear reactor at Three Mile Island. This decision is driven by the need to support the growing energy demands of artificial intelligence technologies, an acknowledgment of the changing landscape since the nuclear accident in 1979.
Economic Indicators and Federal Reserve Actions
Currently, experts are considering a “no-landing” scenario for the U.S. economy, characterized by steady growth combined with the potential reemergence of inflation. Historically, significant interest rate hikes have been used to control inflation, as seen in the early 1980s under Paul Volcker when the federal funds rate soared to an unprecedented 22%. While inflation was managed, the consequences led to a recession and raised unemployment to 11% by 1982. Recent Fed actions have similarly affected marginal banks, forcing a delicate balance between controlling inflation and maintaining liquidity in the economy.
Moreover, the Congressional Budget Office (CBO) anticipates a staggering $1.9 trillion deficit for fiscal 2024 against nearly $5 trillion in tax collections. This situation illustrates a substantial overspend of approximately 40%, which contributes to the ongoing strength of the economy. Recent positive indicators include better-than-expected retail sales and lower jobless claims, although resulting monetary inflation could manifest as consumer price inflation.
The Chinese Stimulus Effect
Additionally, China’s central bank is implementing stimulus measures aimed at boosting the economy, including interest rate cuts and stock market support initiatives. While these steps may take time to influence the market fully, they could significantly enhance energy demand on a global scale.
Why Phillips 66 is a Prime Investment Opportunity
Phillips 66 finds itself in an advantageous position, benefiting from lower oil costs while demand for refined products, such as gasoline and diesel, is expected to rise. Misconceptions about refiners often lead investors to overlook their potential, typically only gaining attention during peak driving seasons. This trend is unfortunate, as Phillips 66 has increased its dividend by 130% over the past decade, with the pandemic being the sole interruption.
The firm’s share price has not yet reflected the growth in dividends, but the connecting force of the “Dividend Magnet” suggests this gap will soon close. Investors can expect that as seasonal demand returns, coupled with management’s commitment to rewarding shareholders through significant stock buybacks—23% of outstanding shares in the last decade—Phillips 66’s financial metrics will look increasingly favorable.
When discussing yield, it’s essential to recognize not only Phillips 66’s current dividend yield of around 3.5% but also its broader shareholder yield, which accounts for dividends and buybacks. To determine this, one must assess the amount spent on buybacks, subtract any cash from share issuances, and add dividends, then divide by the company’s market cap. For Phillips 66, this calculation reveals an impressive 10.3% shareholder yield that positions it well among investors looking for strong returns.
Market Trends Favoring Phillips 66’s Growth
The combination of declining oil prices, anticipations of falling interest rates, and the historical lag between share prices and payouts all contribute to upward pressure on Phillips 66’s stock. This situation indicates potential for significant appreciation, poised to catch up to and exceed current dividends.
Explore Additional Dividend Opportunities
This phenomenon isn’t unique to Phillips 66; five more dividend growth stocks are displaying similar trends that promise substantial gains in the coming months. These selections span various sectors, including utilities, technology, and recreation, ensuring exposure to market winners in a potential “no-landing” economic environment.
Strategically investing in these dividend growers now will enable you to capitalize before their share prices rise further. To discover these five “payout-powered” stocks and read a complimentary Special Report detailing their names and ticker symbols, click here.
Also see:
- Warren Buffett Dividend Stocks
- Dividend Growth Stocks: 25 Aristocrats
- Future Dividend Aristocrats: Close Contenders
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
