The stock market enjoyed a strong first half, with the S&P 500 rallying 14.5%. Given the election uncertainty and growing macroeconomic concerns, it will be hard for the market to repeat that performance in the second half.
Many dividend stocks enjoyed even stronger first-half returns, including NextEra Energy (NEE 0.08%), Targa Resources (TRGP 0.22%), and ExxonMobil (XOM 0.15%). While they'll likely face similar second-half headwinds as the broader market, they stand out to a few Fool.com contributors because they could deliver an encore performance in the second half.
NextEra Energy rebounded in the first half
NYSE: NEE
Key Data Points
Reuben Gregg Brewer (NextEra Energy): Although NextEra Energy is a utility, it somehow managed to provide investors with a total return of just over 18% in the first half of 2024. That soundly beats the S&P 500 index's total return of roughly 15%. That said, NextEra Energy's price performance really represents a bounce back after rising interest rates led to a steep price decline. So investors probably shouldn't go in here thinking that a utility stock is going to shoot to the Moon.
And yet there's something unique about NextEra Energy that will still attract investors: dividend growth. Over the past decade, the company's dividend growth has averaged around 10% a year. That's a good number for any company, let alone a utility. But here's the thing -- management is calling for dividend growth of 10% through at least 2026, backed by annual earnings growth of between 6% and 8% through 2027. So in this way NextEra Energy should be just as rewarding in the future for dividend growth investors as it has been in the past.
The key to the story is that Wall Street knows NextEra Energy is a dividend growth stock. It prices the shares accordingly, usually at a premium to other utilities. But so long as the dividend keeps growing at a rapid clip, the shares are likely to remain strong performers. The price drop that occurred when rates rose was based on the fear that dividend growth would be curtailed. Since that's not the case, it's reasonable to expect this dividend growth machine to keep on chugging along.
Lots of momentum heading into 2025
NYSE: TRGP
Key Data Points
Matt DiLallo (Targa Resources): Shares of Targa Resources rocketed in the year's first half, surging 48.2%. That crushed the S&P 500's 14.5% gain over the first six months of 2024.
Several factors fueled Targa's big move. The pipeline company reported record adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the first quarter, driven by record volumes in the Permian and for liquefied petroleum gas exports. Its growing earnings and free cash flow gave the company the fuel to return more cash to investors. It announced a monster 50% dividend increase in the first quarter. The company also repurchased $124 million of its stock in the period.
Targa still has a lot more growth coming down the pipeline. The company completed a new expansion project in May. It also secured two more projects, which it expects to complete in the fourth quarter of 2025 and the third quarter of 2026. They will add to the backlog of projects the company expects to complete in the coming months. Those expansions should continue driving its earnings and cash flow higher over the next few years.
The midstream company is about to hit a major inflection point. Targa Resources expects its total capital spending to decline from a range of $2.3 billion to $2.5 billion this year to around $1.4 billion in 2025 as its current wave of capital projects enter service. That will supply it with about $1 billion of incremental free cash flow next year. The company could use that excess cash to buy back more shares and continue boosting its dividend.
With momentum building for 2025, Targa could continue to deliver market-crushing returns in the second half of 2024 and beyond.
This oil giant keeps growing
NYSE: XOM
Key Data Points
Neha Chamaria (ExxonMobil): After ending 2023 with barely 2% gains, ExxonMobil stock surged 15% in the first half of 2024, mirroring S&P 500 index gains. Rising crude oil prices, a big acquisition, and strong growth projections propelled shares of the oil and gas giant higher in recent months. ExxonMobil stock rose the most during the first few months of 2024 and hit all-time highs in April, also a period when crude oil prices rebounded sharply.
Earlier in the year, ExxonMobil delivered industry-leading earnings of $36 billion and as much in free cash flow for 2023. It distributed $32.4 billion among its shareholders in the form of dividends and share repurchases, with 2023 also marking ExxonMobil's 41st year of consecutive dividend increases.
ExxonMobil's 2023 earnings, however, were lower compared with 2022, and that trend continued into the first quarter, with its Q1 earnings dropping nearly 28% year over year. That partly explains why the oil stock has cooled down a bit since late April, but investors overall remain focused on ExxonMobil's growth prospects.
The oil giant took a massive growth leap in May by acquiring Pioneer Natural Resources in an all-stock deal worth $64.5 billion. The acquisition more than doubles ExxonMobil's footprint in the Permian Basin and is expected to be immediately accretive to its earnings and cash flows. Those higher earnings and cash flows should start reflecting in ExxonMobil's upcoming quarterly numbers and help the stock maintain momentum for the rest of the year.
ExxonMobil's stock, in fact, should keep humming beyond 2024 given management's expectation to more than double its earnings potential and nearly double its cash flows by 2027 versus 2019 at a Brent crude oil price of $60 per barrel.
