The global economy is a perfect storm for near-record-high oil prices. Geopolitical tensions have taken much of Russia's supply off the market. Years of underinvestment paired with the brutal COVID-19-induced downturn left global supply unprepared for the rebound in demand for natural gas, gasoline, jet fuel, and diesel.
The average stock in the energy sector has gained over 60% year to date, but there are still bargains -- even after the run-up. Emerson Electric (EMR -0.02%), Devon Energy (DVN 0.98%), and Phillips 66 (PSX -0.35%) are three dividend stocks that are worth considering now.
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The high price of oil provides a boost to Emerson Electric
Lee Samaha (Emerson Electric): Process automation and climate control company Emerson Electric definitely isn't all about oil. On the contrary, earlier this year, CEO Lal Karsanbhai made it clear he was moving the company away from the upstream oil and gas business. He reiterated this position on the company's second-quarter 2022 earnings call in May, saying, "we will continue to divest commoditized, upstream oil and gas businesses." Moreover, only 11% of the company's sales were in the upstream oil and gas end market in 2021.
As such, investors don't have to worry too much about Emerson's long-term exposure to oil in an age when a transition to clean energy is taking place.
That said, the high oil price will inevitably boost Emerson's automation business with exposure to upstream oil in the near to medium term. Moreover, high energy prices will encourage investment in liquefied natural gas (LNG) and other energy sources Emerson Electric has exposure to. Discussing the matter on the second-quarter earnings call, Karsanbhai said he sees "continued oil and gas spend" as part of the "beginning of a strong growth cycle," while "we saw more activity around key energy segments such as LNG, clean fuels, and renewables." That will translate into increased process automation orders if energy prices remain high.
Management expects $3 billion in free cash flow in 2022. It's a figure that will easily cover its dividend payment of $1.2 billion. With good growth prospects in the coming years, Emerson Electric should be able to carry on rewarding investors with increased dividends.
Dig into this dividend darling
Scott Levine (Devon Energy): The steep climb in oil prices over the past few months has left drivers wincing at the sight of their fuel gauges inching toward empty. But it's not only bad news resulting from higher energy prices; many oil and gas stocks have also risen, providing a bit of a boom to investors. Over the past three months, for example, shares of Devon Energy, an exploration and production (E&P) company with onshore operations located in the United States, have soared by 33%. Income investors and energy investors are likely taking a look at Devon Energy, which offers a 6.8% forward dividend yield.
Investors whose portfolios aren't presently energized with Devon Energy may feel the stock's recent rise has left it too pricy to pick up right now, but that's hardly the case. Shares of Devon Energy are currently trading at 14.6 times trailing earnings -- a discount to its five-year average price-to-earnings (P/E) ratio of 32.3. Prefer value stocks with inexpensive forward earnings multiples? No problem. The stock still looks cheap, with shares priced at 9.1 times forward earnings, representing a notable discount to their five-year average forward P/E of 20.9.
While high-yield dividend stocks provide investors great opportunities to generate strong passive income streams, it's important to investigate the financial health of the companies behind the high payouts. Regarding Devon Energy, it seems that Devon Energy's substantial dividend isn't jeopardizing the company's well-being. Over the past 12 months, Devon Energy's payout ratio has been a conservative 50%. In addition, management specified on the recent first-quarter 2022 conference call that it expects to strengthen its balance sheet through the remainder of the year, resulting in zero net debt by the end of 2022.
This industry-leading refiner has a high dividend yield
Daniel Foelber (Phillips 66): After reaching 10-year lows in 2020, U.S. retail gasoline and diesel prices, as well as jet fuel, are now at 10-year highs.
US Retail Gas Price data by YCharts
Refining capacity is strained, putting leading refiners like Phillips 66 in the catbird seat. Moreover, oil majors are showing little interest in investing in petroleum refining.
For example, in January, Shell announced the sale of its 50.005% interest in the Deer Park, Texas, refinery outside of Houston for $596 million. "As part of its Powering Progress strategy, Shell plans to consolidate its refinery footprint to five core energy and chemicals parks. These locations will maximize the integration benefits of conventional fuels and chemicals production while also offering new low carbon fuels and performance chemicals," said Shell in a press release.
In an interview with Bloomberg TV, Chevron CEO Mike Wirth said: "We haven't had a refinery built in the United States since the 1970s. I believe there will never be another new refinery built in the United States."
The downstream industry, arguably more so than any other part of the integrated oil and gas value chain, has received a lack of investment. After all, it's a tough business when things aren't going well.
In 2020, Phillips 66 lost $3.98 billion, its worst annual loss since it split with ConocoPhillips. In 2021, it posted net income of $1.32 billion -- a drop in the bucket compared to past years -- as a lack of demand for jet fuel weighed on its bottom line. However, the narrative has completely flipped in 2022. And it could stay that way for a while as producers scramble for refiners that will take their crude.
Phillips 66 has a dividend yield of 3.5%. Despite trading near a three-year high, Phillips 66 is expected to generate so much profit this year that its forward P/E ratio is just 10.5. Add it all up and you have an excellent source of passive income that also benefits from the demand for refined products.
