The energy sector has been on a good run so far this year. S&P 500 energy stocks are collectively up 41.2% as of market close on Aug. 31, outperforming the tech sector, which is up 22.4%. Despite the strong run, investors are generally drawn to energy stocks for their reliable, typically above-average dividends.
Two energy stocks with attractive dividends are ExxonMobil (XOM -0.02%) and Energy Transfer (ET -0.11%), and their appeal goes beyond current payouts. Both have shown a commitment to increasing their payouts, giving investors predictable income growth.
If you're looking for dependable high yields, both of these stocks are worth considering.
Image source: The Motley Fool.
The oil giant you don't have to second-guess
ExxonMobil is the largest energy company in the U.S. and the second-largest in the world based on market cap ($661.8 billion). It has operations in all phases of the energy supply chain, but most of its business comes from oil and gas production, referred to as the "upstream."
ExxonMobil just paid out the fourth of its quarterly $1.03 payment for its $4.12 annual dividend. When ExxonMobil announces its new dividend, it'll be the 44th consecutive year that it has increased its annual dividend. Not quite Dividend King status (a company with 50 consecutive years of increases), but it's all but certain that it's on its way there.
Its dividend yield as of market close on Aug. 31 was 2.6%, which is below its 3.3% average over the past three years, but that's largely because the stock is up 30% year to date. Investors love ExxonMobil for its dividend, sure, but you can bet they also appreciate the run its stock has been on this year.
NYSE: XOM
Key Data Points
ExxonMobil is also a company whose dividend you don't have to second-guess; its business is a well-oiled machine (no pun intended). In the second quarter, its free cash flow was $17.2 billion, while it paid out only $4.3 billion in dividends.
That said, given the cash flow ExxonMobil has coming in, investors are wondering whether we'll see a higher dividend boost in the upcoming year than the 4% it has raised each of the past four years. We won't know until its third-quarter earnings call, but given the higher yields offered by other energy companies (including Chevron at 3.5%), it wouldn't surprise me if they raise it more than we've seen in the past few years.
The lucrative pipeline company
Energy Transfer is a pipeline company that operates over 140,000 miles of energy infrastructure. Its current yield is 6.3%, one of the highest that you'll find from a company of Energy Transfer's size.
It isn't structured like a traditional company; it's a master limited partnership (MLP), meaning investors act as business partners instead of traditional shareholders. That allows Energy Transfer to pass on most cash flow to investors, which helps drive its high payout yield.
Energy Transfer has recently put in place its 19th consecutive quarterly increase to its payout, now sitting at $0.34. At the rate its business is going, there should be plenty more of those in the works, too. Energy Transfer's pipeline (again, no pun intended) is filled with plenty of projects that are guaranteed to keep the cash flow coming in.
NYSE: ET
Key Data Points
A good thing about the pipeline business is that it doesn't matter how expensive oil and other energy commodities are; Energy Transfer receives the same amount. That consistency protects its dividend from market price swings.
When tax time comes, Energy Transfer will send out a Schedule K-1 form instead of the standard Form 1099 most companies send, so it'll be an extra step when filing your taxes, but many investors find that slight "inconvenience" worth the lucrative dividend that Energy Transfer pays.
