Energy Stocks Have Potential New Appeal: Dividends

The S&P 500 index’s dividend yield has fallen during the past year. But in the energy sector, dividends remain plump and could be appealing to investors weary of trying to find income. The SPDR S&P 500 Energy Sector exchange-traded fund is yielding 3.7%, well above two sectors tied for second-real estate and utilities-at 2.9%. Meanwhile, the average for the S&P 500, predicated on the payout in the last four quarters, is 1.3%, as the 10-year Treasury yield is about 1.45%.

Today, demand shows no sign of fading. Oil prices are rising, & most analysts expect them to stay strong; some investors are betting that oil can eclipse $100 per barrel by the end of 2022, this means companies will probably have significantly more cash to deploy. In 2019, the SPDR ETF’s quarterly dividend averaged 8% higher than today, wrote DataTrek Research co-founder Nicholas Colas, “while West Texas Intermediate crude was actually lower than today’s levels.”

In the past couple of months, some companies have hiked dividends, issued special dividends, or begun policies to return more to shareholders. Shale producer Devon Energy has begun issuing variable dividends, in which the company pays a fixed dividend with a 1.5% yield, then adds in a variable dividend worth up to 50% of the excess free cashflow after funding the fixed payout. Devon recently forecast a dividend yield of more than 7% for 2021. Pioneer Natural Resources will institute an identical policy in 2022; Cimarex and EQT are considering it.

Meanwhile, tried-and-true dividend payers look more solid. Exxon Mobil isn't only in a position to cover its dividend from operating cash flow, but analysts are needs to forecast that it will also boost the payout.