The energy sector is one of the best spots for income-focused investors these days. The average energy stock in the S&P 500 yields 3.6%. That's second best in the index to real estate's 3.7% and more than double its average of 1.6%.
TotalEnergies(NYSE: TTE), Plains All American Pipeline(NASDAQ: PAA), and Devon Energy(NYSE: DVN) stand out among oil dividend stocks. The trio currently offers yields above 4%. Here's why a few Fool.com contributors believe they're ideal options for income-seeking investors these days.
TotalEnergies supplies energy, not just oil
Reuben Gregg Brewer (TotalEnergies): With a 4.7% dividend yield, TotalEnergies is offering investors a generous energy-tied passive income stream. Notably, the European company stuck by its dividend through the energy downturn during the early days of the coronavirus pandemic. Peers BP and Shell cut their dividends. What's most interesting, however, is that the dividend cuts at BP and Shell came along with commitments to shift their businesses in a cleaner direction. TotalEnergies made the same commitment, but without the dividend cutting.
Clean energy, which was recently broken out as a separate division in the company's financial reports, makes up only around 6.5% of TotalEnergies' business segment adjusted net operating income. So it is still, by and large, an oil company. Clearly, oil and natural gas will continue to power the company's top and bottom lines for years to come. But it's also making the subtle shifts necessary to support the world's energy needs with an "all of the above" strategy. For example, part of the plan from here is to reduce its focus to only its best oil assets while increasing exposure to cleaner burning natural gas.
So what you're getting with TotalEnergies is a generous income stream from an oil company that has proved it appreciates the needs of income investors. And that, at the same time, is slowly adjusting with the world around it so that it provides the carbon fuels the world still needs and the clean energy that the world increasingly desires. For more conservative dividend investors, that's probably going to be an attractive combination.
A high-yielding and steadily rising payout
Matt DiLallo (Plains All American Pipeline): Master limited partnerships (MLPs) are often great options for income-seeking investors. Most operate midstream infrastructure like pipelines that generate predictable fee-based income. That provides them with lots of stable cash flow to pay dividends.
Plains All American Pipeline stands out for those seeking an oil-fueled dividend. The MLP makes most of its money operating oil pipelines and related infrastructure. They generate steady fee-based cash flow as oil moves through its system to support its 6.9% yielding payout.
The pipeline company expects to generate $1.6 billion in free cash flow this year. That will easily cover its $1 billion in distributions to investors. That will leave it with $600 million of excess free cash flow to fund new investments and strengthen its already solid balance sheet. Plains All American Pipeline recently closed a $145 million bolt-on acquisition in the Permian Basin. Meanwhile, continued debt reduction has it on track to achieve a leverage ratio of less than 3.5, which is below its target range of 3.75 to 4.25. Plains All American Pipeline is also investing about $325 million this year on high-return capital projects.
The combination of organic growth, acquisitions, and falling interest expenses will grow the MLP's free cash flow. That will give it more money to return to investors. The company plans to increase its cash distribution by $0.15 per unit annually for the foreseeable future (around a low-teens annual growth rate from the current level).
Plains All American Pipeline's high-yielding and steadily rising dividend makes it an attractive option for income-seeking investors these days.
A high-yield stock that pays more as oil prices rise
Neha Chamaria(Devon Energy): With a massive 7% yield, Devon Energy is a lucrative dividend stock for oil investors. To be sure, Devon's dividends can be volatile, especially since the oil and gas producer pegs its variable dividend to cash flows which fluctuate with oil prices. Yet Devon is on solid footing, so much so that investors can still earn good dividends from the stock even if crude oil prices tank 50% from here.
The thing is, Devon has a low breakeven funding level of $40-per-barrel oil, meaning it can fund all its operating and capital expenditures this year at this price. Anything beyond that is the money Devon can spend on repaying debt, repurchasing shares, and paying out dividends. Dividends are a priority for the company, though, and they can grow quickly if oil prices are on the rise thanks to Devon's dividend policy.
Devon pays a fixed base dividend every quarter and, on top of that, pays up to 50% of the excess free cash flows (FCF) in the form of a variable dividend. Because of low oil prices, Devon declared a total dividend of only $0.49 per share in its second quarter, which was significantly below its Q2 2022 dividend of $1.55 a share. But with oil prices rising again, I expect Devon to announce a bigger dividend in the coming weeks when it announces its third-quarter numbers.
With acreage in top U.S. resource plays including the Delaware Basin, oil production growing steadily, and management's focus on financials and FCF growth, Devon Energy is a great oil dividend stock to bank on for some extra income.
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Matthew DiLallo has no position in any of the stocks mentioned. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer has positions in TotalEnergies. The Motley Fool has positions in and recommends BP. The Motley Fool has a disclosure policy.
