The energy sector has outperformed in the first half of 2021.
Crude oil prices rallied in 2021 as demand ramped up quickly, reaching $73 a barrel for West Texas Intermediate. The comeback in oil prices propped up the stock price of energy companies with some nearly doubling their stock value. Investors seeking income should invest in the energy sector, says Rob Thummel, senior portfolio manager at TortoiseEcofin. Energy infrastructure stocks, including master limited partnerships, offer dividend yields of 6% to 7% that are significantly higher than the 1.5% dividend yield of the S&P 500, he says. Energy stocks remain cheaper than other sectors and are trading below record levels unlike the S&P 500 that is trading at record highs, Thummel says. Here are six energy stocks to consider adding to your portfolio.
Western Midstream Partners (ticker: WES)
Western Midstream Partners, a midstream company with assets in the Rocky Mountains, Pennsylvania, Texas and New Mexico, has a 5.9% dividend yield. The energy sector is attractive to investors due to the high free cash flow yields allowing companies to increase dividends, buy back shares and lower debt levels. “Western Midstream is uniquely positioned to deliver on all three factors,” Thummel says. Energy companies have reined in capital spending, which resulted in double-digit free cash flow yields for the sector and compares to a 5% free cash flow yield of the S&P 500, he says. “The fundamentals remain in place for double-digit free cash flow yields that are forecasted to rise even higher in 2022,” Thummel says. “Higher free cash flow serves as a catalyst for continued strong performance as energy companies deliver higher dividends, stock buybacks and reduce debt.”
Chevron Corp. (CVX)
Chevron still provides a generous dividend yield of 5.16% and remains steadfast on being a traditional oil company. Chief financial officer Pierre Breber said at a June Reuters conference that the company does not plan to decrease its oil and gas operations despite increasing shareholder pressure to lower its carbon emissions. Instead of adding wind or solar power, Chevron will allocate $3 billion to technology during the next seven years to get rid of harmful emissions from its operations. The oil behemoth acquired Noble Energy, another oil producer, in a $5 billion all-stock deal in July 2020. Chevron demonstrates several qualities of the classic value stock, says Robert Johnson, a finance professor at Creighton University’s Heider College of Business.
NRG Energy (NRG)
While NRG shares have lagged the S&P 500 by 14% on a year-to-date basis largely due to headwinds, the company still offers a dividend yield of 3.2%. NRG’s cash flow is expected to improve since it was affected by a February winter storm that caused a blackout in Texas, says Michael Underhill, chief investment officer at Capital Innovations in Pewaukee, Wisconsin. The electricity provider reported a loss of $967 million during the first quarter. “We see a compelling total return at 55% to our updated $57 price target,” he says. “Longer term, we see a path for NRG to trade closer to consumer staples or telecom companies versus a traditional independent power producer given their control of customer relationships and strong cash flow profiles. Our target price implies material upside and could prove conservative if a further rerate occurs.”
Suncor Energy (SU)
Suncor Energy is one of Canada’s largest integrated energy companies and operates in Canada, the U.S. and the North Sea. Suncor provides a 2.9% dividend yield and reported generating $1.7 billion in funds from its operations during the first quarter. Suncor reported lowering its debt by $882 million and repurchased more than $300 million in common shares. Cash flow increased to $1.9 billion for the first quarter of 2021, compared with $1.38 billion in the prior year quarter. Investors should not expect oil prices to rise exponentially, Thummel says. “Oil prices will remain stable per barrel as the global economy continues to recover,” he says. “I don’t expect oil prices to spike too much higher as OPEC has significant volumes that can be returned to the market if the global recovery accelerates even more.”
EOG Resources (EOG)
EOG Resources, a Houston-based oil and gas company, has a strong balance sheet and provides a dividend yield of 1.96%. The company reported during the first quarter that it would provide a special dividend of $1 per share and a regular quarterly dividend of $0.4125 per share, totaling an annual total cash return to shareholders of $1.5 billion. EOG reported that it generated $1.1 billion of free cash flow and repaid with cash on hand the $750 million aggregate principal amount of its senior notes due in 2021.
Energy giant BP provides a 4.86% dividend yield. In June the company acquired 9 gigawatts of U.S. solar development projects from U.S. solar developer 7X Energy. This deal increases the company’s renewables pipeline from 14 GW to 23 GW. BP predicts that the projects will provide 8% to 10% returns. The company also owns offshore wind interests in the U.S. and U.K. and aims to develop 50 GW of renewable generating capacity by 2030. BP generates one of the best production outlooks of international oil companies and since Feb. 10, 2021, has outperformed Shell (RDS), TotalEnergies SE (TTE), Chevron and Exxon Mobil Corp. (XOM), Underhill says. European oil companies are wildly underowned. “I remain constructive on them all,” he says. “At the current crude oil price of $70 per barrel, BP could return 7.2% in 2021 and 10.1% in 2022.”
Best energy dividend stocks to buy now:
— Western Midstream Partners (WES)
— Chevron Corp. (CVX)
— NRG Energy (NRG)
— Suncor Energy (SU)
— EOG Resources (EOG)
— BP (BP)
More from U.S. News