It's in volatile times, like this one, that investors truly appreciate the importance of stable dividend income. With Russia and Saudi Arabia set to destroy the energy sector's fragile recovery, it is more important than ever to select energy stocks carefully. It's better to focus on companies that can deliver even in lower commodity prices. Three such companies are Phillips 66 (NYSE:PSX), Valero Energy (NYSE:VLO), and Enterprise Products Partners (NYSE:EPD).
Where the oil prices may go from here is difficult to predict. However, if they go down, or remain where they are currently, refining companies should gain. Crude oil is refineries' main input. If crude oil prices are low, refiners' input costs go down. However, the price of output -- gasoline, diesel, and other products -- doesn't fall as quickly. So, refiners benefit when crude oil prices fall.
Another factor in play is the expected fall in gasoline and diesel demand because of the novel coronavirus outbreak. We don't know which factor will have a bigger impact, but the takeaway message here is that the decline in oil prices isn't a profit-killer for refiners.
Lower costs are more crucial than ever in times when growth is challenging. Phillips 66 has long been able to keep its input costs low compared to other refiners due to a higher use of low-cost Canadian crude. After the stock's recent fall, its yield has risen to very attractive levels. With a conservative debt-to-capital ratio of around 32%, the company looks well placed for any short-term disruptions in demand due to coronavirus.
Until electric cars become mainstream -- which means for the next few decades -- demand for Phillips 66's products will be robust. The stock can, of course, fall more from here, but predicting the bottom is difficult. At the current levels, the yield looks good. What's more, it looks safe, and the company's outlook remains strong.
Like Phillips 66, Valero Energy should benefit if oil prices remain suppressed. Valero Energy should also benefit from the extension of blenders' tax credit for a five-year period and an expected strong demand for renewable diesel. In the last few years, Valero Energy has been returning value to its shareholders through share repurchases and dividend increases. With a debt-to-capital ratio of nearly 31%, the company's leverage looks conservative.
Valero stock's yield has risen to very attractive levels after the latest sell-off. As markets are fearful, I think it's time to be greedy with this stock.
Enterprise Products Partners
The midstream energy giant's distribution yield has risen above 10%. Chances are high that the MLP's distribution will sustain. Enterprise Products has increased its distributions for 62 consecutive quarters -- a period that includes the 2008 market crash and the 2014 oil price downturn. Enterprise Products' financial discipline has allowed it to accomplish this.
The MLP is now also not dependent upon equity issuances to fund growth. A distributable cash flow of 1.7 times its distribution should allow Enterprise Products to weather any short-term challenges while keeping the distributions intact.
Diversified and strategically located assets across natural gas, NGLs, and crude oil lend relative stability to Enterprise Products' earnings. Additionally, a major part of its earnings is fee-based.