In times of recession, investors tend to flock to dividend-paying stocks because capital gains growth is difficult to achieve and the payout provides an offsetting income stream. Particularly in an inflationary environment, dividends can help ease the pressure on stocks.
We’re in such a spot right now with the Consumer Price Index at 9.1% and the Federal Reserve’s own favorite inflation measure, the Personal Consumption Expenditure Index, peaking in 40 years by 6.8% in June.
He marks a acceleration of inflation and means dividend-paying stocks will become even more important to investors. It also suggests that betting on the energy sector might be your smartest bet, as the era of high prices and skyrocketing industry profits is far from over. You can count on the following three stars energy stocks for a lifetime of passive income.
Chevron (NYSE: CVX) is an oil and gas giant, and this huge energy company just saw its profits quadruple compared to a year ago, far exceeding anything Wall Street predicted.
Chevron certainly benefited from the factors at play in the second quarter, which saw its downstream refining operations benefit from higher margins, despite some offsetting losses in its chemicals business, while much higher average selling prices for petroleum and gas have driven its domestic and international upstream production assets to generate record profits.
Chevron is looking to ramp up production as demand shows no signs of slowing. This is why oil and gas stocks remain a rich opportunity despite the growing share of alternative energy sources in global usage. There simply isn’t enough capacity for solar, wind and biofuels to meet demand, so fossil fuels will be with us for decades to come.
With a 35-year record of increasing its dividend, which yields 3.5% per year, Chevron should provide a strong and secure passive income stream for investors.
Enterprise Product Partners
Enterprise Product Partners (NYSE:EPD) is one of the largest publicly traded partnerships in the country, and its activities cover the middle segment – pipelines and storage – of the energy supply chain. It has more than 50,000 miles of pipeline, 14 billion cubic feet of natural gas storage and 260 million barrels of storage capacity for natural gas liquids (NGLs), crude oil, refined products and petrochemicals, while having 21 NGL processing plants.
As a master limited partnership (MLP), Enterprise Products Partners was designed – and is required – to pass on nearly all of its earnings to its shareholders in the form of dividends, which currently yield 7.1% per annum. Its payout is also considered very safe, as its payout-to-coverage ratio, or the amount of cash flow available for distribution compared to what it actually pays out to its shareholders, stood at 1.8 at the end of the last trimestre.
Although the ratio should generally not drop below 1, as this would imply that the dividend is not sustainable, nowadays investors do not want their MLPs to cut it that close. They are looking for a cushion and demand growth capital expenditures come largely from their operating cash flow.
Enterprise Products’ second quarter results just released show that while they expected $1.6 billion in growth capital expenditures for the year, they generated $2.1 billion in dollars of operating cash flow for the quarter. And it purposely began making the transition to internally fund its growth investments without tapping equity or debt markets as early as 2017. MLP also increased its distribution this quarter by 5.6% , offering investors the best of both worlds.
It wasn’t just Chevron hit the gas on second-quarter earnings — ExxonMobil (NYSE: XOM) was also blowing up stock charts when its earnings beat analysts’ expectations. Although it fell short of its revenue estimates, Exxon crushed it on earnings, reporting $4.14 per share in earnings when Wall Street thought it would only get $3.74 per share. .
Like its peer, Exxon benefited from higher prices and tight supplies, leading its production and refining operations to end up with natural gas realizations and refining margins well above its 10-year range. . Coupled with a cost-cutting program that is (figuratively) paying dividends for investors, it helps explain why Exxon stock is up 58% year-to-date, with much more room to maneuver. .
Exxon, of course, is the biggest of the energy giants, with a valuation of $411 billion (in contrast, Chevron is No. 2 at $324 billion). And because it has worked to limit its expanded production operations to those that are most profitable, it has some of the most attractive opportunities in the world – such as those in Guyana, where it focuses on processing this country into a top-10 producer.
Exxon has increased its dividend for 39 consecutive years, making it a member of the Dividend Aristocratsand there’s no reason it shouldn’t continue to provide a passive income stream for at least 39 years or more.
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