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3 High-Yield Energy Picks to Invest Like "Bond King" Bill Gross
In his latest investment outlook, Bill Gross - the co-founder of Pacific Investment Management better known as Wall Street's “bond king” - emphasized the risks of investing in bonds and stocks right now. According to Gross, interest rates will likely remain elevated as inflation refuses to cool down amid robust employment rates, which will weigh heavily on stocks.
And with Treasury yields running hot, even the king himself is bearish on bonds, suggesting he doesn't think Fed Chair Jerome Powell “will be willing or able to lower short rates significantly” with inflation stuck above the central bank's target. So with stocks and bonds both off the table, where should you invest right now?
According to Gross, Master Limited Partnerships, or MLPs, are one way to take advantage of higher oil prices. In the simplest terms, MLPs are publicly traded limited partnerships that generate 90% of their revenue from qualifying sources. These sources include the exploration, production or transportation of natural resources, as well as from real estate.
Most MLPs are part of the energy sector, and offer attractive dividend yields to shareholders as they distribute a majority of earnings to investors - similar to real estate investment trusts.
While Gross says oil prices (CLX23) might also be “toppy," the high dividend yields of MLPs make them attractive to income-seeking investors. Here are three high-yield energy stocks to consider right now.
Energy Transfer LP
Part of the midstream vertical in the U.S., Energy Transfer (ET) operates a network of pipelines transporting commodities such as natural gas (NGX23), natural gas liquids, crude oil, and refined products. Valued at a market cap of $43.03 billion, Energy Transfer also owns and operates hydrocarbon fractionation and storage facilities.
Around 90% of its EBITDA (earnings before interest, tax, depreciation, and amortization) is tied to fee-based contracts, shielding the company from fluctuations in prices. This allows it to pay shareholders an annual dividend of $1.24 per share, indicating a forward yield of 8.68%.
Priced at 11 times forward earnings, Energy Transfer stock is quite cheap.
Out of 12 analysts covering the stock, 10 recommend “strong buy,” one recommends “moderate buy,” and one recommends “hold.” The average target price for Energy Transfer is $16.61, which is about 20% above its current price.
Plains All American Pipeline LP
Another midstream player, Plains All American Pipeline (PAA), is an energy infrastructure company. It offers storage and logistics services for commodities such as natural gas, natural gas liquids, and crude oil.
With ties to quality oil basins, PAA also enjoys a lower cost base compared to peers, allowing it to more than double free cash flow sequentially in Q2 and reduce balance sheet debt.
The company’s crude oil pipeline volumes were up 13% in Q2, enabling it to increase segment EBITDA by 7%. It is on track to end the year with an EBITDA of $2.5 billion, allowing PAA to pay shareholders an annual dividend of $1.07 per share - which translates to a yield of 7.4%. Higher oil prices in the last two years have enabled PAA to increase dividends by 50% since 2021.
Out of the 16 analysts tracking PAA, 10 recommend a “strong buy,” four recommend a “hold,” and two recommend a “strong sell.” The average price target for PAA is $17.03, indicating an upside potential of about 15% from current levels.
Enterprise Products Partners LP
The final high dividend stock on my list is Enterprise Products Partners (EPD), which is valued at $58.8 billion by market cap. With one of the lowest debt-to-EBITDA multiples in the energy sector, Enterprise Product Partners has an investment-grade balance sheet, providing it with the required flexibility to consistently pay shareholders a dividend.
With a payout ratio of less than 60%, EPD has increased dividends by 6.5% annually in the last 25 years. It currently pays shareholders an annual dividend of $1.96, which suggests its yield is quite juicy at 7.22%.
Priced at 11 times forward earnings, EPD is forecast to increase earnings by 5.4% annually in the next five years.
Out of the 13 analysts tracking EPD, 11 recommend a “strong buy,” and two recommend a “hold.” The average price target for EPD is $31.54, indicating an upside potential of 15% from current levels.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
