Earn Passive Income of $1,000 in Five Years by Investing $3,000 in These Three Energy Sector Dividend Stocks.
The S&P 500 only offers a paltry 1.3% yield due to the increasing prominence of growth companies that either don't pay dividends or have low yield rates. Retirees and investors relying on passive income may need to explore alternative markets for better returns.
The energy sector is an attractive option due to its balance of yield and value. Many oil and gas companies offer dividends and have relatively low valuations. Here are three outstanding choices for income-focused investors: Phillips 66 (0.35% yield), Chord Energy (-0.34% yield), and the Global X MLP ETF (-0.08% yield).
Phillips 66's earnings are more robust than they appear
Phillips 66, a significant player in the refining and midstream industries, reported third-quarter 2024 earnings on Oct. 29. The reported earnings per share were $0.82, but the adjusted figure was a healthier $2.04.
Companies often adjust earnings to account for non-recurring expenditures or charges that do not represent operational performance. In Phillips 66's earnings breakdown, the company noted a significant $605 million in legal accrual expenses, with the footnote indicating that the legal accrual is primarily related to ongoing litigation. The charge seems to stem from a recent court ruling against the company. On Oct. 17, a California jury ruled in favor of Propel Fuels Inc., concluding that Phillips 66 should compensate the low-carbon fuels provider for $604.9 million due to the misuse of confidential data and the theft of trade secrets.
The expense has negatively impacted Phillips 66's earnings and reputation. Even without this charge, Phillips 66 is struggling to perform at its peak. As shown in the following chart, sales growth has stalled, and operating margins have been compressed as Phillips 66 navigates a challenging pricing environment, unfavorable crack spreads, and other hurdles.
Given all the unfavorable news, you may be wondering why Phillips 66 is worth investing in now. The company is implementing strategies to reduce debt and improve its cost structure. It is divesting assets in Switzerland (and possibly in Germany and Austria) and closing its underperforming refinery near the Port of Los Angeles.
In June 2023, it completed its acquisition of DCP Midstream for $3.8 billion. In the recent quarter, Phillips 66 achieved its $400 million run-rate synergy target related to the acquisitions. In total, it achieved $1.4 billion in run-rate cost savings – which should help improve profitability, even with lower refining margins.
Furthermore, the stock price has plummeted to its lowest level for the year. The sell-off has pushed the dividend yield up to 3.8% – an appealing level for income investors.
Since July 2022, Phillips 66 has returned $12.5 billion to shareholders through buybacks and dividends and is on track to meet its target of $13 billion to $15 billion in capital returns by year's end. Going forward, it intends to distribute approximately 50% of its operating cash flow to shareholders through buybacks and dividends.
In conclusion, Phillips 66 seems to be enhancing the quality of its portfolio, despite some short-term challenges. The sell-off represents a buying opportunity for patient investors aiming to boost their passive income from this industry leader.
Chord Energy's generous dividend is a joy for income investors
Chord Energy, a lesser-known name in the world of dividend oil stocks, has gained attention due to its 9.1% forward-yielding stock and commitment to financial well-being and returns to shareholders. Its impressive free cash flow sets it apart from its competitors.
Offering revenue from oil, natural gas, and natural gas liquids production, Chord Energy generates most of its income from the sale of oil (approximately 96% based on second-quarter 2024 financial results). From its assets in the Williston Basin, the company produces substantial free cash flow, averaging $1 billion annually for the last three years. This may be impressive, but it means little without a point of comparison. Consider Chord Energy's peer group, including Coterra Energy, Marathon Oil, Ovintiv, and Permian Resources. Of these, Chord Energy boasts the highest free cash flow yield.
Strong free cash flow is expected to continue in the near future. If the oil benchmark, West Texas Intermediate, averages $70 per barrel in 2024, management projects a 2024 free cash flow yield of 9%, rising to 12% if the price averages $80 per barrel.
Regarding their dividend policy, management prioritizes returning capital to shareholders. If Chord Energy has a net debt-to-EBITDA ratio above 1, it pays a base dividend. If the ratio falls below 1, Chord Energy pays the base dividend plus 50% of its free cash flow. If the leverage ratio drops below 0.5, the company returns the base dividend and 75% of its free cash flow.
Energy investment firm Chord Energy strikes the perfect chord for income seekers wishing to venture into the oil market.
This ETF presents a relatively secure avenue for investing in energy infrastructure
*Lee Samaha(Global X MLP ETF):* Changing times call for a fresh investment strategy. That's the idea behind considering investments in midstream pipelines and storage facility shares. I'm not implying that the shift towards renewable energy won't materialize. In fact, I believe it will, but perhaps not as quickly as anticipated. Moreover, I contend that** natural gas will continue to play a substantial role in the U.S. and global energy industries for several decades.
Expressed in simple terms (disregarding inflation and discount rates), if this ETF's current quarterly distribution of $0.90 remains sustainable, it would take around 13 years to amass dividends equivalent to your initial investment.
Although there's no promise that this will occur, investing in natural gas is influenced by political decisions, the indispensable need for widely accessible, dependable, non-sporadic energy sources, such as natural gas, to serve as a transitional fuel and maintain low energy prices, is also subject to political implications.
This ETF offers an opportunity to spread the investment risk associated with purchasing any individual midstream pipeline and storage share. It currently owns 20 master limited partnership (MLP) shares (MLPs are exempt from paying corporate income taxes and typically provide high dividends). These shares are solely focused on midstream pipeline and storage facility companies that typically earn consistent income from long-term contracts. At a cost of only 0.45%, it's an affordable way to tap into an enticing high-yield sector.
After considering alternative markets for better returns, some investors might find the energy sector appealing due to its balance of yield and value. Many oil and gas companies, such as Phillips 66, offer dividends and have relatively low valuations.
Despite facing legal accrual expenses and negative impacts on earnings and reputation, Phillips 66 has strategies in place to improve its financial situation. It is divesting assets and closing underperforming facilities, achieving cost savings, and distributing a significant portion of its operating cash flow to shareholders through buybacks and dividends. This has pushed the dividend yield up to an appealing 3.8% for income investors.
