The energy sector is a great place to hunt for dividends these days. The industry is generating a lot of cash flow thanks to relatively higher oil prices. Meanwhile, valuations remain fairly low, which has pushed up dividend yields.
ExxonMobil (XOM -2.78%), MPLX (MPLX 0.17%), and Enterprise Products Partners (EPD 0.45%) stand out to a few Fool.com contributors for their oil-fueled dividends. Here's a look at why dividend lovers should take a closer look at this trio.
Exxon provides dividend growth in every market
Reuben Gregg Brewer (ExxonMobil): The one thing that investors need to clearly understand about oil and natural gas is that they are volatile commodities. That basically means that top- and bottom-line performance for companies like energy giant ExxonMobil will also be volatile. There's no easy way around that, but well-run companies are prepared for this. Exxon is a well run company, highlighted by its 41 years worth of annual dividend increases -- despite ever volatile energy prices.
One important reason for the dividend resilience is the company's integrated model, which gives it exposure to drilling, pipeline, and refining operations, as well as geographic diversification. Since some areas of the business are likely to be performing better than others at any given time, commodity highs and lows are blunted. But the big story here is Exxon's deft use of its balance sheet.
XOM Debt to Equity Ratio data by YCharts
Exxon tends to maintain a low level of leverage. This gives it the ability to take on debt when oil prices are low so it can support its business and dividend through the weak patch. When energy prices recover, as they always have historically, management pays down the debt it took on. This flexibility is massively important for investors that are looking for dividend stocks in the energy patch and makes Exxon an attractive through-the-cycle holding. The dividend yield is 3.3% today.
A big-time, energy-fueled payout
Matt DiLallo (MPLX): MLPX doesn't get enough credit for its ability to generate income for investors. The master limited partnership (MLP) has increased its distribution per unit every year since oil refiner Marathon Petroleum formed it in 2012 to operate and acquire midstream energy infrastructure:
MPLX Dividend data by YCharts. NOTE: MPLX paid a special distribution payment of $0.575 per unit in November 2021.
Overall, the MLP has increased its payment by nearly 185% from its initial level, including by 10% last November.
The pipeline company currently yields 8.9%, one of the highest payouts in the energy patch. That big-time distribution is on a very sustainable level. MPLX generates very stable cash flow backed by long-term contracts with companies like Marathon. Meanwhile, it produces significantly more cash than it distributes to investors. Its distribution coverage ratio was a very comfortable 1.6 through the first half of this year. That enabled the MLP to retain enough cash to cover its expansion projects with room to space.
It used that excess cash to strengthen its already solid balance sheet. MPLX ended the second quarter with a 3.5 leverage ratio, well below its 4.0 target.
MPLX has several expansion projects currently under construction that should come online over the next couple of years. They'll provide the MLP with incremental cash flow, giving it more fuel to increase its distribution. That sizable, sustainable, and growing distribution makes MLPX an attractive investment for income seekers to buy and hold.
Enterprise Products Partners is the model of income stability
Neha Chamaria (Enterprise Products Partners): Enterprise Products Partners is one of the most popular dividend stocks in the energy patch, and rightfully so. Enterprise Products paid its first dividend in 1998 after its initial public offering and has grown its dividend every year since. This year marks the company's 25th straight year of dividend increases, and over the years, Enterprise Products has returned nearly $50 billion to its shareholders in the form of dividends and share buybacks.
So what makes Enterprise Products such a bankable dividend stock? First is its business model. Enterprise Products is one of the largest midstream oil and natural gas pipeline companies in the U.S. that earns fees under long-term contracts to store and move the commodities around. Its cash flows are, therefore, quite steady and less prone to volatility in oil and gas prices. Second, the company prioritizes financial discipline and uses cash judiciously to reward shareholders while ensuring manageable debt and high liquidity.
Notably, Enterprise Products' distributable cash flow (DCF) coverage has improved considerably in recent years. For example, its DCF could cover dividends by a solid 1.8 times in the trailing 12 months through the second quarter of this year. It was 1.2 in the year 2017. DCF is a great metric to gauge how safe an oil stock's dividends are, and Enterprise Products clearly passes the test. That further makes this 7.6%-yielding stock a great bet for income investors.
