Energy Stocks to Invest in
If you have been following the market in recent years, you would know that energy stocks are not exactly hot commodities. Since the downturn in oil prices started in the summer of 2014, many energy companies experienced huge drops in their stock prices. And since a stock’s dividend yield moves inversely to its price, their yields—if the companies didn’t cut their dividends—have become quite attractive. In this article, we are going to take a look at energy stocks with high dividends.
Energy Stocks with High Dividends
One thing that investors should keep in mind is that not all energy companies are the same. Within the broad energy sector, there are quite few different industries, such as the petroleum industry, the gas industry, the electrical power industry, the coal industry, and the renewable energy industry, just to name a few.
With oil and gas prices down dramatically over the last two years, energy companies involved in these industries were hit hard. With the downturn in their stock prices, their dividend yields can look very attractive right now. But note that sometimes their yields are high simply because investors don’t believe their dividends will be sustainable. And buying high-yield stocks right before their dividend is cut can turn out to be a very expensive experience.
Also, as income investors, you want to invest in companies that can provide a healthy stream of income in the long term. Fortunately, within the energy sector, there are companies whose businesses were not affected that much, even with the huge tumble in commodity prices. Those companies are probably better bets for income investors than those energy stocks that have double-digit yields today.
One group of energy stocks that can be a good fit for an income portfolio is midstream partnerships. These partnerships manage the transportation and storage of energy products. Because they are not drilling new wells, they are less concerned with the fluctuations in oil prices.
Moreover, most of them are organized as master limited partnerships (MLPs). They are required, by law, to distribute most of their cash to investors. In return, they do not have to pay income taxes at the corporate level. That’s why for years, MLPs have been providing above-average yields to income investors.
Another group of energy dividend-paying stocks is utilities. No matter where you live, you likely have to pay utility bills every month. Whether it’s electricity or natural gas, this is what consumers and businesses need on a daily basis. As a result, utility stocks are known for providing a stable income to dividend investors. On top of that, because it takes a lot of resources to build the infrastructure needed to deliver gas, water, and electricity to households, it doesn’t make sense to have two utility companies providing the same service in the same area. That’s why governments allow utility companies to operate as monopolies in their respective municipalities.
Below I have compiled a list of seven energy stocks that pay a healthy dividend.
7 Energy Stocks that Pay Healthy Dividends
| Company Name | Stock Ticker | Dividend Yield |
| Blueknight Energy Partners L.P. | BKEP | 8.0% |
| Enviva Partners LP | EVA | 7.8% |
| Buckeye Partners, L.P. | BPL | 7.6% |
| National Grid plc | NGG | 5.2% |
| Southern Co | SO | 4.6% |
| Duke Energy Corp | DUK | 4.4% |
| Phillips 66 Partners LP | PSXP | 4.2% |
1. Blueknight Energy Partners LP
With S&P 500 companies yielding a measly two percent on average, this midstream partnership provides a yield that quadruples that.
Blueknight Energy Partners L.P. (NASDAQ:BKEP) is a MLP formed in July 2007. Headquartered in Oklahoma City, Oklahoma, the partnership has three operational segments: crude oil terminaling and storage, crude oil gather and transportation services, and asphalt terminaling, storage, and processing services. Its asset portfolio includes 17.6 million barrels of crude oil and petroleum product storage capacity, 985 miles of pipeline, 240 crude oil transportation and oilfield service vehicles, and 54 liquid asphalt cement terminals and storage facilities. (Source: “Operations,” Blueknight Energy Partners L.P., last accessed January 19, 2017.)
Trading at $7.25 apiece, BKEP stock has an annual dividend yield of eight percent.
Of course, high-yield stocks are not always safe bets. And by looking at Blueknight’s latest earnings report, it seems that net income had a sizable year-over-year decline. However, note that in the same period last year, the partnership benefited from $8.3 million in income related to the settlement of litigation. After taking this one-time item out of the way, Blueknight would have delivered significant year-over-year improvements in both adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and distributable cash flow in the reporting quarter. (Source: “Blueknight Announces Third Quarter 2016 results,” Blueknight Energy Partners L.P., November 1, 2016.)
In the third quarter of 2016, the partnership had a distribution coverage ratio of 1.49 times, a very impressive number compared to its peers.
2. Enviva Partners LP
Enviva Partners LP (NYSE:EVA) is a bit different from other MLPs because it is not really involved in oil and gas at all. Rather, it is in the business of processing a type of biofuel, namely wood pellets.
Wood pellets are the most common type of biofuel. Enviva makes its money by aggregating wood fiber, a natural resource, and processing it into wood pellets. Enviva’s customers use wood pellets to replace coal in power generation. Most of the partnership’s wood pellets are sold through long-term, take-or-pay agreements, making its cash flow more predictable.
Enviva has been generating some impressive cash flow. In the third quarter of 2016, the partnership’s distributable cash flow came in at $20.9 million, representing a 34.8% increase year-over-year. This also provided 1.57 times coverage for its third-quarter distribution. (Source: “Enviva Partners, LP Reports Strong Financial Results for Third Quarter 2016, Announces Drop-Down Transaction, and Provides Guidance for 2017,” Enviva Partners LP, November 3, 2016.)
Right now, Enviva Partners has a quarterly distribution rate of $0.53 per unit, translating to an annual dividend yield of 7.77%. Since the partnership’s initial public offering (IPO) in May 2015, it has raised its payout every single quarter.
3. Buckeye Partners, L.P.
When looking for energy stocks with high yields, investors should not ignore Buckeye Partners, L.P. (NYSE:BPL). In the U.S., Buckeye is one of the largest independent liquid petroleum products pipeline operators in terms of volumes delivered. Its portfolio consists of approximately 6,000 miles of pipeline and more than 120 liquid petroleum products terminals, with total storage capacity of over 115 million barrels. (Source: “Business Operations,” Buckeye Partners, L.P., last accessed January 19, 2017.)
With a quarterly distribution rate of $1.2250 per unit, Buckeye Partners has an annual dividend yield of 7.62%.
Buckeye stock has a relatively long history among MLPs. It completed its IPO in December 1986, and since then, it has paid a cash distribution in every single quarter.
The best part is that the partnership is still growing its payout. In the past three years—a devastating period for many energy companies—Buckeye’s quarterly distribution rate has increased 14%. (Source: “Distribution History,” Buckeye Partners, L.P., last accessed January 19, 2017.)
According to the company’s latest earnings report, Buckeye Partners had a distribution coverage ratio of 1.2 times. (Source: “Buckeye Partners, L.P. Reports Record Results For The Third Quarter 2016,” Buckeye Partners, L.P., October 24, 2016.)
4. National Grid plc
Other than MLPs, investors looking to boost the yield of their income portfolios should also consider high-dividend utility stocks, such as National Grid plc (NYSE:NGG).
National Grid is an international electricity and gas network company operating in the U.K. and Northeastern U.S. The company has four main types of assets in its portfolio: gas distribution (36%), electricity transmission (32%), gas transmission (14%), and electricity distribution (13%). Approximately two-thirds of National Grid’s assets are in the U.K. (Source: “NG. Focus,” National Grid plc, November 2016.)
In recent years, National Grid’s operating margins have been consistently staying above 25%. Moreover, the company dividend payout ratio is at just 54% of its earnings per share, a low number compared to its peers. (Source: “Report for the six months ended 30 September 2016,” National Grid plc, last accessed January 19, 2017.)
NGG stock currently has an impressive dividend yield of 5.17%. However, note that its dividends are paid on a semiannual basis, rather than quarterly.
5. Southern Co
Southern Co (NYSE:SO) is the second-largest utility company in the U.S., serving more than 9 million customers. It owns electric utilities in four states, natural gas distribution utilities in seven states, a generation company serving wholesale customers, and a provider of customized energy solutions and fiber optics and wireless communications. The company has a total generating capacity of 44,000 megawatts and 1,500 billion cubic feet of combined natural gas consumption and throughput. (Source: “Our Business,” Southern Co, last accessed January 19, 2017.)
The company has paid continuous dividends for 68 years. Moreover, it has been raising its quarterly dividend rate every year for over 10 years.
Paying $0.56 on a quarterly basis, Southern Co has an annual dividend yield of 4.57%.
6. Duke Energy Corp
Duke Energy Corp (NYSE:DUK) is one of the largest electric power holding companies in the United States. It supplies and delivers electricity to approximately 7.4 million U.S. customers. The company’s service area covers 95,000 square miles in North and South Carolina, Indiana, Ohio, Kentucky, and Florida, with total generation capacity of 50,200 megawatts. Duke Energy also transports and sells natural gas in portions of Ohio and Kentucky. (Source: “About Us,” Duke Energy Corp, last accessed January 19, 2017.)
Investors looking for energy stocks for their retirement portfolio should take a serious look at Duke Energy because of its reliable dividends. The company has paid consecutive quarterly dividends since 1926. The U.S. economy had quite a few ups and downs during the past 90 years, but Duke Energy did not miss a single dividend payment.
Right now, the company has a quarterly dividend rate of $0.855 per share, translating to an annual yield of 4.43%.
7. Phillips 66 Partners LP
Phillips 66 Partners LP (NYSE:PSXP) is a master limited partnership formed by Phillips 66 (NYSE:PSX) to own, operate, develop, and acquire primarily fee-based midstream assets. The partnership focuses on fee-based businesses supported by contracts with minimum volume commitments and inflation escalators. These contracts help Phillips 66 Partners LP reduce the volatility in its cash flows.
Headquartered in Houston, Texas, Phillips 66 Partners’ portfolio consist of the Bayway rail track, the Clifton Ridge crude system, the Ferndale rail rack, the Gold Line products system, the Hartford Connector products system, and the Medford products spheres, as well as several joint ventures and projects under construction. (Source: “Operations,” Phillips 66 Partners LP, last accessed January 19, 2017.)
Phillips 66 Partners made its initial public offering (IPO) in July 2013, so it is a relatively new MLP on the market. And, despite the downturn in oil and gas prices in recent years, the partnership’s dividends have only been growing. Since its IPO, PSXP stock’s quarterly distribution rate has increased by 275%.
Paying $0.558 per common unit, Phillips 66 Partners LP has an annual dividend yield of 4.24%.
The partnership has raised its payout every quarter since its IPO, which might seem a bit aggressive. However, a peek at its financials would show that PSXP has a distribution coverage ratio of 1.24 times, leaving a margin for safety. The partnership has also been growing its bottom line, with quarterly earnings increasing by 23% year-over-year to $83.1 million in the third quarter of 2016. (Source: “Phillips 66 Partners Reports Third-Quarter Earnings,” Phillips 66 Partners LP, October 28, 2016.)