Crude oil prices have been scorching hot this year. They've rallied more than 25%, pushing prices above $60 a barrel. That's enabling oil companies to generate a gusher of cash flow, which some are using to pump up their dividends.
While oil is in rally mode right now, crude prices are notoriously volatile. Because of that, the current rebound in the energy market could quickly fade. However, even if that happens, several of the sector's dividend stocks should be just fine. With that future turbulence in mind, we asked some of our contributors which ones look like good buys right now even if the current rally fizzles out. They chose Enbridge (NYSE:ENB), Total (NYSE:TOT), and Williams Companies (NYSE:WMB).
The line in the sand
Reuben Gregg Brewer (Total): With oil prices back to where they were prior to the coronavirus pandemic, some investors might be tempted to jump into the energy sector with both feet. That could be a mistake, given that the industry still faces material headwinds, not least of which is the world's ongoing shift toward non-carbon energy sources. Oil prices could easily fall anew. That's why Total is so attractive.
During the pandemic, Total came out with two very important statements. First, it recognized the importance of the dividend to investors. Second, it said that it could maintain its current payment so long as oil averaged around $40 a barrel. Even if oil starts to drop again, that $40 line should hold and give investors something to monitor so they can assess the safety of their income stream. None of the other oil majors provided that level of guidance, with two of Total's European peers, Royal Dutch Shell and BP, actually cutting their dividends.
But Total isn't just an oil play; the company has long invested in the clean energy space. And it is planning to shift along with the world toward a lower carbon future, while maintaining its dividend. That includes reducing oil production (by focusing on its best assets), increasing its natural gas exposure (a cleaner alternative to oil), and investing materially in its "electrons" business (its goal is to expand this segment from 5% of sales to 15% by 2030).
Even if oil prices don't stay at current levels, Total should provide investors with a safe dividend and a path toward a clean future.
This high-yield stock is unlikely to fail you
Neha Chamaria (Enbridge): If you're looking for dividends in the energy sector, the safest bet would be stocks that haven't missed a dividend payment even during the most volatile times. That way, you could ensure a steady flow of income even when the sector's running dry. And there's nothing like a stock that has increased for years, through thick and thin. As I write this, one name that comes to mind is Enbridge, currently yielding a hefty 7.4%.
While several oil and gas companies cut or suspended dividends in 2020, Enbridge increased its dividend by 3%, marking its 26th consecutive year of annual dividend increases. That's certainly impressive given how turbulent the oil market was last year. In fact, the Canadian energy infrastructure company recently delivered solid numbers for 2020, including 2% growth in distributable cash flow (DCF).
During Enbridge's latest earnings release, CEO Al Monaco stressed how committed the company is to dividends. "Our dividend remains central to our value proposition and we expect to ratably grow it up to the level of average annual DCF per share growth, while maintaining a payout of 60-70% of DCF," he said. Here's the best part: Enbridge expects 5% to 7% growth in DCF through 2023, backed largely by a humongous pipeline of projects. So as DCF grows, so should Enbridge's dividends in line with management's target payout.
It's also worth noting that Enbridge's dividend has grown at a solid compound annual growth rate of 10% in the past 26 years. In other words, you can expect not just stable but growing dividends from this high-yielding stock, which is a win-win for any investor in energy stocks.
Plenty of fuel to keep growing
Matt DiLallo (Williams Companies): Fluctuations in energy prices can significantly impact the ability of energy companies to maintain and grow their dividends. That was evident last year as many energy companies slashed or suspended their payouts to conserve cash when crude prices crashed. This year, the opposite is happening as many energy companies are pumping their dividends back up now that oil prices are in rally mode.
However, natural gas pipeline giant Williams Companies barely has any exposure to commodity prices. Because of that, it produced record results last year. That gave it the fuel to increase its dividend by 5% in 2020. Meanwhile, it had plenty of cash left over to finance expansion projects and reduce debt. As a result, its dividend, which yields 7% following another 2.5% increase in 2021, is as strong as ever.
That payout will likely continue growing even if the current rally in the energy market stalls out. That's because Williams has several contractually secured expansion projects in its backlog to fuel future growth. On top of that, it has several other natural gas infrastructure expansion opportunities in the pipeline. It's also in the early stages of seeking ways to leverage its current infrastructure footprint to support even cleaner alternative fuels like renewable natural gas and green hydrogen. Therefore, it should have the power to continue paying a steadily growing dividend for years to come. Given that long-term upside, Williams is a great dividend stock to buy and hold even if energy prices cool off.