If you are looking for dividend stocks, you'll probably be interested in Pioneer Natural Resources' (PXD +0.00%) 10.6% yield. Before you jump on that, however, you'll want to understand a lot more about how the dividend that backs the yield is determined. In fact, you might be better off owning Enterprise Products Partners (EPD +0.75%) or Magellan Midstream Partners (MMP +0.00%) despite their lower, though still incredibly generous, 7.6% and 7.9% yields, respectively.
You can't count on the payment
Pioneer Natural Resources is a respected company in the energy patch. From a big-picture perspective, it is a U.S.-based oil and natural gas producer currently benefiting from strong energy prices. Notably, third-quarter 2022 earnings were boosted by higher selling prices for oil and natural gas on a year-over-year basis. This is why the company declared a dividend of $5.71 per share, to be paid in the fourth quarter of the year. That payment was up from the $3.64 per share it paid in the same period of 2021.
NYSE: PXD
Key Data Points
So far this story sounds wonderful, that is until you compare the company's third-quarter 2022 performance to the second quarter. When you do that, you see that realized prices were lower for two of its three main products and that the dividend payment was cut by 33% sequentially. The problem here is that energy prices are highly variable, so the company has moved toward paying a smaller core dividend with a variable dividend on top of it. In fact, the variable component accounted for around 60% of the cash returned to investors in the third quarter (the core dividend was 15% and share repurchases were 25%).
The problem is that the huge variable component to the dividend means that income-focused investors simply can't rely on the dividend staying at its current level. Sure, it could go up, but if you are trying to live off of the income your portfolio generates, the risk that the payment could go down should keep you on the sidelines here. That remains true despite the very high yield on offer from Pioneer.
Reliable payers
The story is pretty much reversed when you look at Enterprise Products Partners and Magellan Midstream Partners. These two master limited partnerships (MLPs) have corporate structures specifically designed to pass income on to investors. There are some tax complications that come along with this, but with 7.6% and 7.9% yields, respectively, the extra effort required by the April 15 tax deadline could easily be worth it.
NYSE: EPD
Key Data Points
Both MLPs operate in the midstream space, which means they own pipelines, storage, processing, and transportation infrastructure. These assets help to move energy from where it is produced to where it eventually gets used. Enterprise and Magellan largely charge fees for the use of their assets, which makes their cash flow highly reliable over time. This is why Enterprise has increased its distribution for 24 consecutive years and why Magellan increased its distribution annually since its initial public offering (IPO) in 2001.
NYSE: MMP
Key Data Points
That said, these two MLPs are not interchangeable. Enterprise is a highly diversified industry giant that's appropriate for even conservative investors. Notably, its distributable cash flow covered its distribution by a huge 1.8 times in the third quarter of 2022.
Magellan is smaller and focused on oil and refined products, like gasoline and diesel. While hardly a high-risk MLP, it is a much larger bet on oil in a world that's increasingly focused on carbon reduction. That's not inherently bad, but it is probably more appropriate for investors with a greater appetite for risk. Notably, Magellan targets distributable cash flow coverage of around 1.2 times, meaning there's less leeway for adversity with regard to the distribution.
Know what you own
If you are looking at the energy sector trying to find high-yield stocks, make sure you look past yield. Pioneer Natural Resources' dividend is huge today, but it is going to fluctuate along with energy prices. That means dividend cuts are just a normal part of life. Enterprise and Magellan, on the other hand, have long focused on providing a consistent income stream to unitholders. Their yields may be lower, but that's probably a worthwhile tradeoff if you are trying to live off of the income your portfolio generates.
