Energy stocks are en fuego again after a drone strike on a Saudi oil facility. WeaEURtmre going to (as usual) skip the geopolitical talk and discuss oil dividends that will benefit from this disruption.
While aEURoebuy and hopeaEUR investors ponder basic ways to play the spike, you and I know that about half of energy returns come from payouts. Check out the orange line below, the total return of a popular energy index with dividends. ItaEURtms nearly double what the stock prices themselves returned:
The Real Key to Oil Riches? Dividends.
No dividend is guaranteed forever. But broadly speaking, income has been a far more reliable source of energy-sector returns than price performance, making up nearly half of energyaEURtms total returns since late 1998.
Brad SorensenaEUR"head of market and sector analysis the Schwab Center for Financial Research and a member of SchwabaEURtms Investment Strategy CouncilaEUR"smartly summed up the mind-numbing task of trying to invest in the energy sector in a recent outlook:
aEURoeThere are myriad shifting winds affecting the energy sector, making a firm call in either direction difficult. Geopolitical events are unpredictable and often affect the energy sector, which should be taken into account along with the fundamentals of the group.aEUR
Energy is always being knocked around by aEURoemyriad shifting winds.aEUR But the dividends are very real, and have in fact helped salvage what has otherwise been a disastrous decade for the energy sector. HereaEURtms a look at West Texas Intermediate crude prices over the past 10 years:
That should translate into pretty modest returns for energy stocks over the same time, and indeed, it does. But dividends have tripled the returns investors wouldaEURtmve received from price performance alone:
The only saving grace? The yield on the sector has ballooned over the past few years thanks to energyaEURtms misfortunes, making it the highest-yielding sector in the S&P 500aEUR"and a potential contrarian play.
Energy Even Has REITs and Utilities Beat
These dividend machines finally have a bit of, ahem, fuel to drive their stock prices higher. So letaEURtms wade through the oil patch together and pick through five payouts (yielding up to 8.5%) that will benefit from an extended oil spike.
Exxon Mobil (XOM)
Dividend Yield: 4.8%
I recently highlighted Exxon Mobil (XOM) for its stability and bulletproof dividend, the latter of which is the picture of health, according to the DIVCON payout rating system. This Dividend Aristocrat has raised its payout for 37 consecutive years, which includes a couple of severe dips in oil prices. Management clearly views the dividend as one of its top priorities.
But that stability? It can cut both ways.
Exxon Mobil is an integrated oil major, which means that itaEURtms more than exploration and production (E&P)aEUR"the segment thataEURtms tightly locked to oil prices. It also has other operations, including refining, which is more dependent on the aEURoecrack spreadaEUR (the difference between the price of a barrel of oil, and the costs of turning it into petroleum products). Indeed, no matter which direction oil is heading, XOM always appears to be torn in both directions.
Just consider the nearly 15% jump in oil Sept. 16 as the market responded to the Saudi attacks. E&P players such as ConocoPhillips (COP) and EOG Resources (EOG) jumped on the spike. Exxon Mobil? More reserved.
This dynamic has made XOM a frustrating holding from a growth standpoint. In fact, this energy titan is almost breakeven over the past decade thanks to weakness since the 2014 oil-price crash.
The only meaningful source of returns?
Dividends Make Up 91% of ExxonaEURtms 10-Year Returns
Price upside isnaEURtmt everything, but you have to get something. LetaEURtms look for more fertile ground.
Enterprise Products Partners LP (EPD)
Dividend Yield: 5.4%
Enterprise Products Partners LP (EPD) has been a much easier stock to hold over the long haul, for several reasons.
First and foremost: EPD is a pipeline company, not a driller. Its operations include more than 49,000 miles of natural gas, nat-gas liquids, crude and other pipelines, not to mention storage facilities, nat-gas processing plants, even import/export terminals.
In short, itaEURtms a aEURoetoll takeraEUR whose fates are more closely tied to how much gas and oil is pumping through its infrastructure than the pure price of those energy commodities. That insulates it somewhat from price fluctuations.
That alone has given EPD shares a more respectable price performance over the past decade, nearly doubling in that time. That still doesnaEURtmt hold a candle to the S&P 500, but that brings me to the real reason to own EPD:
Enterprise Products Partners is closing in on Dividend Aristocrat status with 21 consecutive years of dividend growth. But what sets EPD apart is that itaEURtms not content to spread the wealth once a year. It improves its distribution each and every three months, and has done so for 59 consecutive quarters.
Add in the dividend, and it more than doubles EPDaEURtms performance over the past decade, putting its returns on par with the market, and several times better than the broader energy sector.
EPD: Where Cash Is King
Alerian MLP ETF (AMLP)
Dividend Yield: 8.5%
If MLPs are so grand, why not diversify by holding a couple dozen of them in a fund?
ThataEURtms the logic behind buying the Alerian MLP ETF (AMLP), which is the largest MLP-focused ETF on the market at more than $8 billion in assets under management. Its tight portfolio of 23 MLPs includes EPD among its top holdings, as well as Plains All American Pipeline LP (PAA), MPLX LP (MPLX) and Magellan Midstream Partners LP (MMP).
ItaEURtms a decent idea in theory, but in practice, I spy a couple of flaws.
For one, this indexed ETF simply has no way to exploit values in the MLP space, no way to gauge growth potential in a few outliers, and so some of its components simply hold it down.
Case in Point aEUR
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.