Stocks are often lumped into categories, such as growth stocks, value stocks, or dividend stocks. But there's a big difference between a stock whose dividend is the primary reason for owning it and one where the dividend is merely one aspect of the investment thesis.
ConocoPhillips (COP 0.39%), Baker Hughes (BKR 1.66%), and Newmont (NEM 0.67%) all have dividend yields well above the S&P 500 average of 1.7%. But all three cyclical stocks offer much more than passive income alone. Here's why.
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A sizable dividend from an industry leader
Daniel Foelber (ConocoPhillips): ConocoPhillips is one of the largest independent oil and gas exploration and production (E&P) companies. Unlike integrated majors, like ExxonMobil or Chevron, ConocoPhillips focuses almost exclusively on producing oil and gas.
ConocoPhillips stock stands out from other E&Ps for a number of reasons. Starting with the dividend, ConocoPhillips has an ordinary dividend and a variable dividend that fluctuates based on the company's performance. On May 4, the company announced a $0.51-per-share ordinary dividend and a $0.60-per-share variable dividend, the same values announced in February. If ConocoPhillips keeps up this pace, it will pay $4.44 per share in 2023 dividends, representing a forward yield of about 4.5%. But the actual number could vary based on the company's performance.
The combination of ordinary and variable dividends is excellent for investors because they can expect to receive eight dividends a year instead of four, benefiting folks who use dividends to supplement income.
Even if ConocoPhillips didn't offer as compelling of a passive income stream, there's reason to believe the stock would still be a great buy now. The company has done a masterful job of reducing its cost of supply and improving the quality of its acreage. When asked about the company's cost of supply and how ConocoPhillips would perform in a $50- to $60-per-barrel West Texas Intermediate (WTI) crude range, CEO Ryan Lance reaffirmed the company's strong balance sheet and its focus on a lean business model. "In terms of how we're running the company day to day and the allocation of capital that we put in each year, it really doesn't -- we're only investing in things that have a cost of supply less than $40 WTI in the portfolio," said Lance on the first-quarter 2023 ConocoPhillips earnings call. Lance went on to say that the company's goal is to distribute about 30% of cash to shareholders but that it was distributing about 50% right now since the business is performing particularly well.
In sum, ConocoPhillips is a well-managed, conservative E&P with an excellent portfolio and a commitment to rewarding shareholders.
Self-help initiatives, old energy, and new energy
Lee Samaha (Baker Hughes): Everyone knows about Baker Hughes' exposure to oil and gas. Its oilfield services and equipment segment offers well services and construction, production solutions, and subsea and surface pressure solutions to the onshore and offshore oil industry. It also provides new energy solutions, such as geothermal and carbon-capture technology.
Meanwhile, the industrial and energy technology segment offers gas and industrial technology used in midstream oil and gas, liquefied natural gas (LNG), and upstream and downstream oil and gas.
So while traditional fossil fuels still provide the bulk of its revenue and earnings, Baker Hughes also has a growth opportunity from LNG and new energy solutions. For example, the company's orders rose 12% year over year in the first quarter to $7.6 billion, but $1.4 billion of those orders came from LNG. Meanwhile, speaking on the earnings call, CEO Lorenzo Simonelli said, "We've stated previously that we believe that by the end of this decade, new energy orders could be in the range of $6 billion to $7 billion and that would imply about 10% of our Gas Tech orders."
In addition to the new energy/LNG opportunity, Baker Hughes has a restructuring program to cut $150 million in annual costs by the end of 2023. Baker Hughes offers investors a compelling mix of traditional energy solutions, a growth kicker from LNG/new energy solutions, and a self-help cost-cutting story. It's an exciting mix that makes the stock one of the best plays in the energy market.
Hungry for dividends and metals exposure? Dig into Newmont
Scott Levine (Newmont): There's no denying the allure of dividends. It's hard to argue with an investment that pays you for doing nothing. But some investors want something a little more -- something like exposure to precious metals. For those in this boat, Newmont represents an excellent option. The company, currently offering a forward dividend yield of 3.4%, is one of the world's premier precious metals producers, and it holds the distinction of the largest publicly traded gold-mining company based on market cap.
Those who add some luster to their portfolios with shares of Newmont are not only augmenting their passive income streams with the dividend but also potentially benefiting from a rise in the price of gold since there's a strong correlation between the price of gold and the movements of gold-mining stocks.
Operating assets on several continents, Newmont is a gold-producing machine. In 2022, the company reported gold production of 6 million ounces, and it forecasts gold production of 5.7 million ounces to 6.3 million ounces in 2023. Despite the impressive amount of the yellow stuff the company digs out of the ground, it's not as if Newmont will run out of places to mine gold in the future. According to its fourth-quarter 2023 financial report, the company has 96 million ounces of gold reserves in its portfolio.
In addition to the capital appreciation they could see from shares rising in concert with increasing gold prices, investors can also benefit from a higher distribution. Newmont's annualized dividend is the product of a fixed amount of $1.00 per share (provided the price of gold is at least $1,400 per ounce) and an additional fixed amount. Based on the price of gold in 2023 and management's forecasts, Newmont expects to return $1.40 to $1.80 per share to investors in 2023 -- though it could be more if gold consistently stays above $2,000 per ounce.
