These Are the Highest-Yielding Dividend Stocks in the Energy Sector
November 24, 2020
These High-Yield Dividend Stocks Pay Up to 30%
Low interest rates have hammered income investors over the past decade, and COVID-19 threatens to make that situation even worse.
In a bid to stave off an economic depression, the Federal Reserve has slashed its overnight lending rate to almost zero percent. That has driven down yields for other fixed-income investments, from corporate bonds and Treasury notes to savings accounts and bank CDs.
You can see the impact of these policies on the payouts from 10-Year U.S. Government Treasury notes. Two years ago, a $100,000 investment would throw off $3,000 a year in interest. Today, that same investment would only generate $86.00 a year.
So where can income hunters possibly go to find yield? One location might be the unlikeliest of places: the oil patch.
Dividend investors have historically avoided the energy sector. And for good reason. Most oil drillers have focused on plowing their profits back into their businesses, which leaves little free cash flow to reward shareholders. And given the boom/bust nature of the industry, meager payouts often get cut in a downturn.
But the energy industry’s reputation has started to change. In recent years, capital-hungry executives have started boosting payouts to shareholders in an effort to attract investor attention. That has transformed the industry into one of the highest-yielding sectors in the stock market.
The oil patch has improved its reputation for investment safety, too. Sure, oil drillers still ride the boom/bust roller coaster of the energy market. But in recent years, a growing number of companies from different industry niches (pipelines, terminals, processing facilities, etc.) have gone public.
These unique firms enjoy much more predictable cash flows, and, by extension, they’ve paid much more consistent dividends.
To help you get started, I’ve highlighted 10 of the highest-yielding dividend stocks in the energy sector.
As I always like to emphasize in my articles, such lists never represent “buy” recommendations. I would never suggest investing in a business just based on the results of a simple stock screen.
This list does, however, serve as a great starting point for further research. Just be sure to do your homework before pulling the trigger on any specific investment.
Let’s dive into the results.
|
Company Name |
Market Cap |
Yield |
|
Frontline Ltd |
$1.3 Billion |
30% |
|
Navios Maritime Acquisition Corporation |
$69.3 Million |
30% |
|
MV Oil Trust |
$30.7 Million |
26% |
|
Oasis Midstream Partners LP |
$338.0 Million |
22% |
|
Euronav NV |
$1.7 Billion |
20% |
|
Shell Midstream Partners LP |
$3.7 Billion |
20% |
|
Antero Midstream Corp |
$3.1 Billion |
19% |
|
Energy Transfer LP |
$15.2 Billion |
19% |
|
USA Compression Partners LP |
$1.1 Billion |
18% |
|
VOC Energy Trust |
$34.0 Million |
17% |
(Source: Trading Central, last accessed November 20, 2020.)
This simple stock screen turned up some interesting dividend stocks.
As you would probably expect, a number of pipeline partnerships popped up in the results: Energy Transfer LP (NYSE:ET), Shell Midstream Partners LP (NYSE:SHLX), and Oasis Midstream Partners LP (NASDAQ:OMP). These firms don’t drill for oil or gas. Instead, they own the infrastructure that ships, stores, and processes these energy commodities in exchange for steady fee income.
Investors prize these assets for their almost bond-like cash flow. Sure, commodity prices might swing wildly from year to year. But the total volume of oil and gas flowing through these networks remains incredibly consistent. That explains why few of these pipeline businesses have slashed their payouts during the recent downturn.
Shipping businesses like Frontline Ltd (NYSE:FRO), Euronav NV (NYSE:EURN), and Navios Maritime Acquisition Corporation (NYSE:NNA) are interesting dividend stocks, too. These companies own the tankers that ship energy commodities across the world’s oceans. While these operations cost a lot of money to get up and running, a shipping fleet doesn’t cost much to maintain. That explains why these names have historically sported outsized dividend yields.
Admittedly, the COVID-19 pandemic has reduced shipping demand for tanker companies. And that will mean meager growth for this industry going forward. But prospective investors can probably content themselves by collecting double-digit annual yields.
The only place where income investors should tread with caution are royalty trusts like MV Oil Trust (NYSE:MVO) and VOC Energy Trust (NYSE:VOC). Like typical energy companies, these partnerships earn their profits by owning oil and natural gas wells across the country. But unlike their corporate peers, these firms invest nothing into new drilling programs. Instead, they’re content to milk existing operations and return all of their profits to their unitholders.
This model has its pros and cons. On one hand, paying out all of their cash flows means these trusts often pay the biggest dividend yields around. On the other hand, these income streams eventually end as the underlying oil wells run dry. Distributions also swing wildly with changes in the energy market.
That doesn’t make royalty trusts like MV and VOC bad investments, per se, but income hunters need to do their homework and understand the potential pitfalls.
