With interest rates likely to move lower starting with the Federal Reserve's September meeting, many investors may move away from the relative security of Treasury bills and back into high-yield dividend stocks. If they do, the energy sector is likely to be a good place for those investment dollars.
While the energy sector has been a poor performer in 2024, that's not likely to be the case heading into 2025. Lower interest rates will be a catalyst for consumer and business spending, and that means higher prices for oil and gasoline.
We're also heading into winter in the Northern Hemisphere, which means an increased demand for natural gas. And with the war between Russia and Ukraine ongoing, Europe is likely to remain the largest importer of liquefied natural gas (LNG).
Then, there's the continued push to transition to renewable energy, which will, paradoxically, increase industrial demand for oil and gas to build the necessary infrastructure.
This special presentation analyzes seven energy stocks with sustainable dividends that offer attractive yields, making them solid options to play the coming boom in the energy sector.
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- Exxon Mobil
- Chevron
- Occidental Petroleum
- Energy Transfer
- Williams Companies
- Kinder Morgan
- Duke Energy
#1 - Exxon Mobil (NYSE:XOM)
The first three stocks on this list are all “big oil” companies. The dividend yields may not jump out at you, but all of the dividends are supported by solid balance sheets.
First up is Exxon Mobil Corp. (NYSE: XOM). The company recently closed its $60 billion purchase of Pioneer Natural Resources, which provides it with access to the coveted Permian Basin. In fact, Exxon Mobil is projecting double-digit returns as it will be able to efficiently recover a larger number of resources. Plus, the company announced plans to sell some of the non-core assets that came from Pioneer, which will help it maintain its strong balance sheet.
Exxon Mobil is a dividend aristocrat that has increased its dividend for 41 consecutive years. The company’s dividend also has a sustainable payout ratio of around 46%. While the three-year annualized dividend growth of 1.13% is not particularly impressive, the total return on XOM stock over the last five years is 115.4% - which means that the dividend is a nice bonus to owning a quality energy stock.
About Exxon Mobil
Exxon Mobil Corporation engages in the exploration and production of crude oil and natural gas in the United States and internationally. It operates through Upstream, Energy Products, Chemical Products, and Specialty Products segments. The Upstream segment explores for and produces crude oil and natural gas.
Read More - Current Price
- $120.35
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 11 Buy Ratings, 8 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $130.21 (8.2% Upside)
#2 - Chevron (NYSE:CVX)
Chevron Corp. (NYSE: CVX) and Exxon Mobil are frequently looked at as the 1 and 1A among oil stocks. Investors would be fine owning either or both, but a case could be made to buy CVX stock in a year when it’s down 4%.
One reason for investors to be skeptical is the company’s pending acquisition of Hess Corp. (NYSE: HES). It has not gone as smoothly as Exxon Mobil’s acquisition of Pioneer. In fact, Exxon is part of the holdup, as arbitration is currently underway involving some of Hess’ assets in the Permian Basin. However, the merger has been approved by both companies and while finalization won’t occur until 2025, it still looks like a go (as of this writing).
Like Exxon Mobil, Chevron is also a dividend aristocrat. The company has increased its dividend for 37 consecutive years and has a healthy 4.58% dividend yield as of September 4, 2024. Chevron has also increased its dividend at an annualized rate of over 5% in the last three years.
About Chevron
Chevron Corporation, through its subsidiaries, engages in the integrated energy and chemicals operations in the United States and internationally. The company operates in two segments, Upstream and Downstream. The Upstream segment is involved in the exploration, development, production, and transportation of crude oil and natural gas; processing, liquefaction, transportation, and regasification of liquefied natural gas; transportation of crude oil through pipelines; transportation, storage, and marketing of natural gas; and carbon capture and storage, as well as a gas-to-liquids plant.
Read More - Current Price
- $161.30
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 13 Buy Ratings, 4 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $174.93 (8.5% Upside)
#3 - Occidental Petroleum (NYSE:OXY)
The last of the big oil stocks on this list is a Warren Buffett favorite, Occidental Petroleum Corp. (NYSE: OXY). It’s true that Buffett also owns CVX stock, but investors who have been watching the oil patch know that while Buffett may like Chevron, he loves Occidental. Buffet's Berkshire Hathaway (NYSE: BRK.B) now owns approximately 25% of the company’s common stock in addition to the 100,000 preferred shares Buffett bought in 2019.
And like Chevron, OXY stock is objectively undervalued as we head into the home stretch of 2024. The stock is down over 7% and is trading near its 52-week low. However, analysts are forecasting a 31% growth in earnings, which supports a 29% increase in the stock based on the current consensus price target.
OXY cut its dividend from 70 cents to just one penny in 2020. But the company has been making up for lost time. Since the beginning of 2002, it has increased its dividend from one cent to 22 cents.
About Occidental Petroleum
Occidental Petroleum Corporation, together with its subsidiaries, engages in the acquisition, exploration, and development of oil and gas properties in the United States, the Middle East, and North Africa. It operates through three segments: Oil and Gas, Chemical, and Midstream and Marketing. The company's Oil and Gas segment explores for, develops, and produces oil and condensate, natural gas liquids (NGLs), and natural gas.
Read More - Current Price
- $50.91
- Consensus Rating
- Hold
- Ratings Breakdown
- 7 Buy Ratings, 12 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $63.65 (25.0% Upside)
#4 - Energy Transfer (NYSE:ET)
Another group of energy stocks that investors should look at for high-yield dividends is midstream energy companies. These companies move oil, natural gas, and other products through a network of pipelines. This makes them solid defensive plays because oil and gas need somewhere to move, regardless of demand.
The first of these is Energy Transfer LP (NYSE: ET). The company owns and operates over 125,000 miles of pipelines across 44 states. ET stock is up 16.4% in 2024 but has been rangebound for much of the summer. One reason for that is the company has posted a slight earnings miss in its last two quarters. However, for those that place value in such things, Energy Transfer has been heavily bought by at least one member of Congress. Virginia Foxx (R-NC) has made eight separate purchases of ET stock in 2024.
The company’s dividend is a key reason ET stock has delivered a total return of 87.24% for investors over the last five years. That dividend yields 8.44% as of September 4, 2024.
About Energy Transfer
Energy Transfer LP provides energy-related services. The company owns and operates natural gas transportation pipeline, and natural gas storage facilities in Texas and Oklahoma; and approximately 20,090 miles of interstate natural gas pipeline. It also sells natural gas to electric utilities, independent power plants, local distribution and other marketing companies, and industrial end-users.
Read More - Current Price
- $18.29
- Consensus Rating
- Buy
- Ratings Breakdown
- 8 Buy Ratings, 0 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $20.00 (9.3% Upside)
#5 - Williams Companies (NYSE:WMB)
The Williams Companies Inc. (NYSE: WMB) operates a network of pipelines and infrastructure solutions that help move natural gas and liquefied natural gas (LNG). Natural gas and LNG will play a key role as a bridge fuel in the world’s transition to renewable energy. The company’s network consists of more than 33,000 miles of pipelines that is backed by long-term contracts and regulated rate structures.
Williams has been aggressively growing its network in 2024 with $1.6 billion in expansion projects, and another approximately $1.8 billion in spending is forecast for 2025. A key metric for midstream companies is their adjusted funds from operations (FFO). In 2024, Williams expects to produce approximately $4.13 per share of FFO. That should easily sustain the company’s dividend, which has a yield of 4.29%.
Trading around $45 per share, WMB stock is near a 52-week high. However, the stock trades at just 11x its adjusted FFO.
About Williams Companies
The Williams Companies, Inc, together with its subsidiaries, operates as an energy infrastructure company primarily in the United States. It operates through Transmission & Gulf of Mexico, Northeast G&P, West, and Gas & NGL Marketing Services segments. The Transmission & Gulf of Mexico segment comprises natural gas pipelines; Transco, Northwest pipeline, MountainWest, and related natural gas storage facilities; and natural gas gathering and processing, and crude oil production handling and transportation assets in the Gulf Coast region.
Read More - Current Price
- $58.70
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 9 Buy Ratings, 6 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $51.54 (12.2% Downside)
#6 - Kinder Morgan (NYSE:KMI)
Kinder Morgan Inc. (NYSE: KMI) is another solid midstream choice for investors looking for a quality, high-yield dividend payer. The company moves oil, natural gas, LNG, refined petroleum, and other energy products through its network of pipelines that spans over 83,000 miles in the United States and Canada. Kinder Morgan has been nimbly adding to its infrastructure in the past 10 years while still strengthening its balance sheet.
The company is forecasting an increase in LNG demand from data centers. These facilities require 24/7 power, and that demand has only increased with the emergence of artificial intelligence (AI) applications. Kinder Morgan’s pipelines run through the area where many of these data centers exist, which is likely to provide a revenue and earnings boost in the coming years.
KMI stock is up 22% in 2024 and has delivered a total return of 47.3% over the last five years. The company’s dividend is 5.38%.
About Kinder Morgan
Kinder Morgan, Inc operates as an energy infrastructure company primarily in North America. The company operates through Natural Gas Pipelines, Products Pipelines, Terminals, and CO2 segments. The Natural Gas Pipelines segment owns and operates interstate and intrastate natural gas pipeline, and storage systems; natural gas gathering systems and natural gas processing and treating facilities; natural gas liquids fractionation facilities and transportation systems; and liquefied natural gas gasification, liquefaction, and storage facilities.
Read More - Current Price
- $28.00
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 6 Buy Ratings, 7 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $25.36 (9.4% Downside)
#7 - Duke Energy (NYSE:DUK)
Duke Energy Corp. (NYSE: DUK) is one of the nation’s largest electric and gas utility companies. Utility companies are known for their reliable revenue and earnings which sustain solid dividends. In the case of Duke Energy, the company has a dividend yield of 3.58% and that dividend has been growing for 20 consecutive years.
But there are two reasons why DUK stock is an intriguing choice for investors looking for high-yield dividend stocks in the energy sector. First, an increasing amount of the company’s revenue is coming from renewable energy. And second, Duke is the second-largest nuclear reactor operator in the United States (measured by capacity). The stigma attached to nuclear power is going away as the world looks for truly clean energy solutions.
Utility companies are not known for strong growth as evidenced by DUK stock’s total return of 51.66% in the last five years. However, the stock is up 19.3% in 2024 and over 31% in the last 12 months.
About Duke Energy
Duke Energy Corporation, together with its subsidiaries, operates as an energy company in the United States. It operates through two segments: Electric Utilities and Infrastructure (EU&I), and Gas Utilities and Infrastructure (GU&I). The EU&I segment generates, transmits, distributes, and sells electricity in the Carolinas, Florida, and the Midwest.
Read More - Current Price
- $113.78
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 7 Buy Ratings, 6 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $121.85 (7.1% Upside)
You've heard that the United States is achieving record oil production in 2024. This is true, but it's not because of new drilling sites. U.S. production growth is flat as regulations remain in place that create obstacles for new drilling. For that reason, many oil and gas companies have prioritized stock buybacks and dividend increases at the behest of their shareholders.
However, oil production is likely to increase regardless of the outcome of the 2024 election. Despite the undeniable transition towards renewable energy, the world will continue to need oil for decades. And both political parties are beginning to coalesce around the idea that more production (and lower costs) will facilitate that transition.
With the average dividend yield of S&P 500 stocks hovering around 1.3%, there are many companies that can provide a sustainable dividend with an above-average yield as a nice boost to what is likely to be a strong total return.
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