Please ensure Javascript is enabled for purposes of website accessibility

Three Rock Solid High Yielding Dividend Stocks In the Energy Sector

By Jay Yao - Mar 15, 2016 at 3:05PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Here are three energy stocks that can either maintain or increase their dividend yields for 2016.

Souce: Pixabay  

It's been a disappointing 12+ months for many energy dividend stalwarts. Kinder Morgan (NYSE: KMI)  cut its dividend by 75% in December. ConocoPhillips (NYSE: COP) slashed its payout by 66% two months later. With crude and natural gas prices so low, the companies don't have much of a choice. They can either choose to keep their growth plans, or they can cut dividends. Many energy companies have decided on the former, and fear that other companies could make the same decision have sent energy stocks even lower.

While most companies in the energy industry aren't doing well, Valero Energy (NYSE: VLO), Occidental Petroleum (NYSE: OXY), and Enterprise Products Partners (NYSE: EPD) stand out from the crowd. They haven't cut their dividends like other energy companies, and their strong balance sheets and robust cash flows insulate the companies from trouble. Best of all, each of the three stocks pay attractive yields. .

A strong refiner 

Refiners received some bad news when Congress reversed the crude export ban in December. Because of Congress' act, WTI's substantial discount to Brent has shrunk, and U.S. refiners, who benefit from the Brent-WTI spread, are making less money because of it. Nevertheless, the U.S. refiners are doing well. Given that natural gas prices are lower in the U.S. than in the rest of the world, U.S. refiners like Valero Energy have lower costs and higher margins than its competitors. Given that refining capacity hasn't expanded much, the industry's operable utilization rate is high, which further increases margins. Because of these trends, refiner earnings are healthy. Valero earned $9.24 per share in 2015, more than enough to cover its annual dividend cost of $2.40 per share. 

Because of its strong earnings and its excellent debt to capital ratio of 0.26, Valero raised its dividend twice last year, once from $0.40 cents per share to $0.50 per share, and another from $0.50 to $0.60 per share. Given its payout ratio of 21.4% and average annual expected earnings growth rate of 8.26% for the next five years, Valero's dividend can grow at a double digit percentage rate for the next five years and the company would still have plenty of cash to left over to repurchase shares or pursue growth initiatives. 

 
A leading independent  
 


Image Source: Occidental Investor Relations

 
Occidental Petroleum management is confident the company won't cut its dividend.. Occidental President Vicki Hollub said recently, "we don't see a threat to our dividend going through this cycle." Management has said that they "expect to be able to continue to grow our dividend for many years into the future." Because it has $4.4 billion of cash on its balance sheet, and expects to receive $900 million from an Ecuador settlement, and an additional $300 million from asset sales, Occidental has more than enough money to cover its dividend cost of $2.23 billion per year. Because Occidental plans to cut capital expenditures by 50% to $3 billion in 2016 as some of its growth projects come online, the company's cash flow picture will remain strong even if crude prices stay lower for longer. 
 

Occidental 2016 estimated cash flow Source: Occidental Investor Relations 

As the above chart illustrates, Occidental expects to make $4.8 billion in cash flow in 2016 assuming a WTI price of $42 per barrel, or just about enough to cover the dividend and the capital expenditure program without having to dip into its $4.4 billion in cash. 
Given that every $1 per barrel change in WTI affects the company's annual operating cash flow by $100 million, WTI could average $30 per barrel until 2017 and Occidental would still have $2 billion on its balance sheet. 
 
 
With one of the industry's least leveraged balance sheets, 13 straight years of dividend raises, and a dividend yield of 4.4%, Occidental will be one of the survivors in the industry that will continue to pay its shareholders even when times become tough. If crude prices rebound, Occidental shares will have substantial upside. 
 
A resilient midstream giant 
Many MLPs lost their credibility because they promised safe dividends and delivered payout cuts instead. Enterprise Products Partners (EPD) isn't one of them, as the company recently raised its quarterly dividend to 39 cents, up from 38.5 cents a quarter earlier. Enterprise also plans to increase its dividend by $0.05 per share every quarter this year, giving it an annual payout of $1.61 per share, or 5.2% higher than 2015's payout of $1.53 per share. The company's annual payout gives Enterprise a yield of 6.67% at current prices. 
 
Enterprise's dividend hikes are due to its strong financial results. For its fourth quarter, Enterprise reported distributable cash flow of $1.09 billion, up from $1.06 billion a year ago, and enough cash to cover its dividend 1.3 times over. Management has kept a close eye on costs. Although Enterprise's fourth quarter revenue dropped 40% year-over-year to $6.16 billion, its total costs fell even further by 43%. Management has made sure that Enterprises debt is manageable, with the company sporting a modest debt to equity ratio of 1.11.
 
Enterprise's dividend is safe, and for this reason Enterprise Product Partners has access to capital, and can still grow during challenging times. When crude prices recover, Enterprise will be in prime position to make an accretive acquisition.
 
Investor takeaway
While many are suffering in the energy industry, Valero, Occidental, and Enterprise Products Partners are delivering robust results. All three have strong balance sheets, and two of the three raised their dividends recently. Each company has the financial strength and flexibility to survive a prolonged energy downturn  and will continue to pay their shareholders handsomely along the way. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Valero Energy Corporation Stock Quote
Valero Energy Corporation
VLO
$106.28 (-2.36%) $-2.57
Enterprise Products Partners L.P. Stock Quote
Enterprise Products Partners L.P.
EPD
$24.37 (-0.77%) $0.19
Occidental Petroleum Corporation Stock Quote
Occidental Petroleum Corporation
OXY
$58.88 (-0.37%) $0.22
ConocoPhillips Stock Quote
ConocoPhillips
COP
$89.81 (-1.80%) $-1.65
Kinder Morgan, Inc. Stock Quote
Kinder Morgan, Inc.
KMI
$16.76 (-0.95%) $0.16

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
317%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.