Dividend-paying energy stocks are probably going to be the best place to collect income for the rest of the decade.
This is great news because the rest of the stock market is expensive and overheated again. Never thought we’d see it with the Fed tightening, but here we are.
Fortunately we have a dip to buy in energy dividends. These stocks have taken a breather after running up at a blistering pace since April 2020.
(Back when oil prices dropped below zero—to negative $37 per barrel. As contrarian dividend investors, we’ve seen it all together, haven’t we? We were here when they paid us to take oil off their hands.)
Anyway, West Texas Intermediate peaked earlier this year at $121 per barrel, or a roughly 65% gain since the start of 2022. You can thank a return to travel and economic growth—combined with Russia effectively blowing up the energy market by attacking Ukraine, triggering oil bans in response.
However, as global economies are showing signs of slowing, and as sky-high gasoline prices finally forced the hands of Americans, who grudgingly tweaked their driving and travel habits, oil is settling down for a moment:
Oil Returns to Double Digits (For Now)
…and so is the cost of gas.
A Big Price Dump at the Pump!
But it’s very likely that the current reprieve for American drivers is a quick one. That’s because there is no “quick fix” to what has been causing higher energy prices over the past year.
The current “crash ‘n rally” (CNR) pattern kicked off in April 2020. Energy prices collapsed quickly (within months or even weeks), setting the stage for a methodical follow-up rally that will last for many years.
Here’s how CNR played out in 2008 and 2020:
- Demand for oil evaporated and its price crashed quickly (2008 and 2020).
- Energy producers scrambled to cut costs, so they cut production aggressively.
- The economy slowly recovered (2009 and late 2020), energy demand picked up, but supply lagged.
- And lagged. And lagged. And the price of oil rallied until supply eventually met demand (2009-2014 and 2020-present).
And given that oil prices tend to drive the entire energy sector—natural gas and infrastructure included—we consider them catalysts for energy profits.
The current downturn? I consider this a short-term “second chance” for investors who missed the first big energy dip—and for those who joined in on our binge in 2020, it’s a great time to dollar-cost average in. Sure, we’re not getting the same bargain-basement prices as we did during the COVID bottom… but we still have a chance to gobble up juicy yields at reasonable levels.
5 Energy Plays Yielding 9.2%-27.3%
Interestingly, the most mouth-watering yields in the space also appear to be standing on shale, metaphorically speaking.
Consider Devon Energy (DVN, 10.5% yield), a major oil-and-gas producer with significant operations in the Delaware Basin. The stock boasts a double-digit headline yield right now, backed by massive dividend growth to boot.
Devon’s Payouts Have Tripled … In ONE YEAR
But that dividend growth, while laudable, isn’t quite what it seems.
In 2020, Devon Energy began an unorthodox but not terribly uncommon dividend program that saw it pay out a quarterly fixed dividend, as well as variable payments each quarter as free cash flow (FCF) allowed.
The good news? Its most recent fixed dividend portion was 64 cents per share, up 45% year-over-year from 2021’s 44 cents. Now, that 64 cents still translates into a still-good 4.3%, but that extra 6.2 percentage points’ worth of yield comes from annualizing the quarter’s extra FCF payout.
Naturally, that looks swell when oil prices are over the triple-digit mark. But over the very long term, energy is cyclical, and those variable payments are extremely difficult to plan around, making it less than ideal for retirement investors looking for high levels of fixed income.
Three other uber-high-yielders on my watch list have similar types of payouts:
- Coterra Energy (CTRA, 9.2%): This Houston-based oil producer is another major Delaware player, boasting 234,000 acres. Its most recent dividend was a 15-cent base payout with a 50-cent variable top-up, so the “reliable” part of that payout is 2.1%.
- Civitas Resources (CIVI, 11.9%): Civitas, which operates wells in 525,000 acres across the Denver-Julesburg (DJ) Basin of Colorado, kept its base quarterly dividend of 46.25 cents level recently. But the variable dividend of $1.30 per share was 44% better than the previous quarter’s variable payout. The base payout translates to a 3.1% yield.
- Pioneer Natural Resources (PXD, 15.7%): Pioneer Natural Resources operates in the Cline Shale, which, just like the Delaware, is part of the larger Permian Basin. Its mid-double-digit yield is anchored by a $1.10-per-share base dividend (up 40%-plus sequentially) and a massive $7.47-per-share variable payout. It’s nice while you can get it, but the base is just 2.0%. Keep that in mind.
Dorian LPG (LPG, 27.3%) is entirely a gamble, dividend-wise. This lesser-known firm is in the business of shipping liquefied petroleum gas, and owns and operates modern very large gas carriers, or VLGCs. And it goes so far as to refer to its own payout as an “irregular” cash dividend.
A 27% yield is irregular? No kidding.
That’s no place for retirement planners, but the sheer potential of a variable dividend that large might entice swing traders.
Look at the Dividend’s Performance Bonus in Just One Year
High (and RELIABLE!) Dividends for Decades
Frankly, I prefer much more settled dividends that we can count on—not just for the next few years of this energy super-cycle, but for decades down the road.
That has me excited about companies like Exxon Mobil (XOM), which has already netted us 83% in just 16 months—and I keep on buying.
But that’s not the only energy name on my list.
In fact, Big Oil is a pivotal part of my “Perfect Income Portfolio”, which features some of the most generous, yet stable, dividend investments I’ve found.
While most of these stocks tend to trade at lofty valuations in normal markets, every now and again, when the market throws a fit, Wall Street throws the baby out with the bathwater and gives us a chance to buy even more on the cheap.
And right now is one of those times where we can stock up on these retirement-ready dividend plays without breaking the bank.
And importantly, with the “Perfect Income Portfolio”, there’s …
- NO gambling your hard-earned nest egg on flimsy day-trading strategies
- NO complex options contracts
- NO fly-by-night penny stocks.
This is just simple buy-and-hold investing, done right.
Let me show you the stocks and funds I believe could stabilize many retirement portfolios. Even better, let me teach you more about this incredible strategy itself and make you a better investor in the process!
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