When your hard-earned money is on the line, it's easy to overcomplicate an investment decision. But often, the simplest course of action can be effective while also letting you sleep well at night.
For many risk-averse investors looking for a steady return, the simple decision could be to turn to dividend stocks that have a good chance of growing their earnings and their payouts over time. The energy industry has been home to high-yield dividend stocks for years and the current imbalance of global oil and gas supply paired with rising demand and years of underinvestment adds a layer of reliability not seen in the energy industry for some time.
Baker Hughes (BKR 1.93%), Devon Energy (DVN 0.98%), and Kinder Morgan (KMI -0.05%) stand out as three particularly attractive oil and gas companies to consider now.
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Value investors should take a look at Baker Hughes
Lee Samaha (Baker Hughes): There are two reasons to buy Baker Hughes. The first is to take advantage of energy prices staying relatively high. The second is to get in on the boost as it potentially catches up with the performance of peers such as Schlumberger and Halliburton.
The idea that energy prices (particularly for oil) will stay high is based on the argument that the dearth of investment since 2014 (when energy prices slumped) and the cautiousness currently displayed by the oil majors will restrain the growth of supply. As such, energy prices are likely to remain high for an extended period, and not experience their historical volatility. Similarly, the high price of oil will induce further growth in spending, benefiting Baker Hughes.
The second argument relates to Baker Hughes' underperformance relative to peers. The reasons for this come down to its exposure to Russia, chip and component shortages due to the supply chain crisis, and some disappointing execution.
Data by YCharts
Many of these issues are likely to prove temporary, and management is taking action to restructure the company and better align its businesses. That should result in cost savings in the future. All told, Baker Hughes has an opportunity to play catch-up with its peers and benefit from ongoing strength in its end markets.
Hitch your passive income wagon to this high-yield energy stock
Scott Levine (Devon Energy): The energy sector is replete with oil and gas stocks that provide ample dividends to shareholders. Shares of Devon Energy, for example, currently offer investors a mouthwatering 8.6% dividend yield. A distribution that high may have some conservative investors questioning the sustainability of the payout, but a closer look at Devon's recent natural gas deal as well as its financials suggests that this stock is a worthy consideration.
Focused on onshore assets located in the U.S., Devon Energy is a leading exploration and production company. Earlier this month, the company took a giant step in expanding the natural gas niche of its portfolio, inking an agreement with Delfin Midstream. The deal, a liquefied natural gas (LNG) export partnership, has the potential to total 2 million tons annually of LNG production. This should translate to a healthy increase in free cash flow for Devon Energy -- an increase that can ultimately be returned to shareholders in the form of dividends.
As of the end of the second quarter, Devon Energy had a net debt-to-EBITDA ratio of 0.4, suggesting the company has taken a conservative approach to leverage, placing it on secure financial footing. In addition, the company's 2022 free cash flow forecast of $6.5 billion suggests that the company has room to strengthen its balance sheet even further by retiring debt.
For those who are interested in not just growing their passive income stream but are on the prowl for a bargain opportunity, Devon Energy's stock is particularly alluring. Currently, shares of Devon Energy are trading at seven times forward earnings, representing a steep discount to their five-year average forward earnings multiple of 20.
A high yield and growth prospects to boot
Daniel Foelber (Kinder Morgan): Just a couple of years ago, pipeline and infrastructure giant Kinder Morgan's growth prospects looked weak. Capital expenditures were at a 10-year low as investors questioned the long-term viability of natural gas infrastructure in an increasingly renewable world.
KMI Capital Expenditures (TTM) data by YCharts
Fast-forward to 2022, and global shakeups in the energy industry make the reliability of natural gas more attractive than ever for energy-dependent countries in Europe and Asia. The U.S. is a net exporter of oil and natural gas. So while domestic growth prospects remain limited, there are opportunities for the U.S. to boost natural gas production, cool and condense the gas into a liquid, and then ship it to buyers around the world.
Lower production costs opened the door to LNG investment projects and now that margins are rising due to higher LNG end market prices, the investment thesis for LNG is more attractive than ever. For LNG to work, there needs to be a balance of natural gas production, LNG export terminals, regasification import plants, and associated pipelines for the importing countries. Increased natural gas demand, not to mention widespread government support to boost LNG imports, is a boon for the U.S. natural gas industry.
The LNG market is dependent on pipelines that connect production points (like those in west Texas or the Utica Shale in the Appalachian Basin) to LNG liquefaction plants. As natural gas output grows, there will need to be more takeaway capacity and associated storage. That's where Kinder Morgan comes in.
Kinder Morgan remains one of the most reliable passive income sources on the market with a current dividend yield of 6.1%. Long-term contracts make for a stable business model that generates enough cash flow to support the dividend even during downturns in the oil and gas market. This reliability was put on display in 2020 when Kinder Morgan's business suffered only minor performance declines. Add it all up, and you have a no-brainer high-yield dividend stock.
