The energy sector can put a jolt into your passive income these days. Many companies across the industry offer high yields because of lower valuations and higher payout ratios. That enables investors to earn more income from their investments.
Two energy stocks with big-time yields are Energy Transfer (ET +1.02%) and Pioneer Natural Resources (PXD +0.00%). They can turn $1,000 into a pretty lucrative passive income stream.
Pushing its already massive payout even higher
Energy Transfer recently gave its investors another huge raise. The master limited partnership (MLP) boosted its quarterly distribution payment by 15%, raising it to $0.305 per unit each quarter. That's 75% more than the company paid in the year-ago period. It also returned the MLP's payout level to its former peak; Energy Transfer had slashed its distribution by 50% in 2020 to retain more cash for debt reduction.
NYSE: ET
Key Data Points
At the reset level, Energy Transfer now yields 9.1%. That implies the MLP can turn $1,000 into $91 of annual passive income. For comparison, $1,000 invested in an S&P 500 index fund would generate only about $17 of annual passive income, given its current dividend yield of 1.7%.
While that's likely the last sizable distribution increase from Energy Transfer, the MLP could continue growing its payout. The company generates plenty of excess cash after covering its distribution. It had been using that excess to finance expansion projects and repay debt. However, with its balance sheet in better shape, it will free up more cash that the company could return to investors through a higher distribution or a unit repurchase program.
Meanwhile, the company's expansion-related spending should grow its cash flow in the future. Energy Transfer expected to invest between $1.8 billion and $2.1 billion in organic expansions last year. It also spent $485 million to buy Woodford Express. In addition, the company has several expansion projects under development, including its Lake Charles LNG export facility, that it hopes to approve this year. As cash flow grows, Energy Transfer will have more money to potentially increase its already sizable payout.
An oil-fueled dividend
Pioneer Natural Resources has an innovative dividend strategy. The oil and gas producer pays a fixed base quarterly dividend each quarter. The current base rate is $1.10 per share each quarter, a level the company can sustain at low oil prices. In addition, Pioneer pays a variable dividend of up to 75% of its quarterly free cash flow after covering the base payout.
Last year, Pioneer paid out over $26 per share in dividends. That gives it an 11% dividend yield at the current stock price. While that payout will ebb and flow with oil prices in the future, Pioneer can pay a gusher of dividends in the coming years:
Image source: Pioneer Natural Resources Investor Relations Presentation.
As that chart shows, the company could pay significant dividends over the next several years if oil prices remain at or above their current level in the low $80s.
Pioneer's CEO Scott Sheffield sees several upside catalysts for oil prices this year. He thinks that Saudi Arabia could cut its production to prop up prices. He sees other factors further tightening supply, including the lack of additional oil releases from the U.S. Strategic Petroleum Reserve and potential issues with Russian supply. Meanwhile, the reopening of Asian economies is a huge demand catalyst. These factors lead Sheffield to forecast $90 as his base case for oil this year, with upside potential to as much as $150 a barrel if demand strengthens and there's an unexpected supply issue. That sets the company up to pay another gusher of dividends in 2023.
High-octane income stocks
Energy Transfer and Pioneer Natural Resources offer investors the opportunity to generate significant income. Energy Transfer recently boosted its payout by 15%, giving investors a big-time payout that should continue growing. Meanwhile, Pioneer Natural Resources offers investors a high-octane payout. While it will fluctuate with its oil-fueled cash flows, the company has massive income potential if crude prices remain high. Given their high yields, these stocks can energize a $1,000 investment and turn it into a very lucrative income stream.
