Think it’s too late to buy oil stocks? These 3 stocks always look great
OIt is a product subject to large and often rapid price fluctuations. The painful fall of the early days of the coronavirus pandemic, for example, was quickly replaced by a massive price spike. The trend is not unusual, although each swing has its own story. And yet, even though oil is at its peak today, there are still great long-term opportunities here for investors, including TotalEnergies (NYSE: TTE), Shell (NYSE: SHEL)and Enterprise Product Partners (NYSE:EPD).
1. Make cash work for investors
When the pandemic hit, TotalEnergies made it very clear that it would support its dividend as long as oil stayed above $40 a barrel. It was the only major integrated oil company to make such a bold statement. In fact, some of his peers have chosen to cut their dividends.
That said, there is an important caveat here. Dividend cuts at companies like Shell and PB have been coupled with clean energy pivots. The logic being that the money freed up through dividend cuts would be used to pay for investments in things like solar and wind power. TotalEnergies said it could both sustain its dividend and invest in clean energy. With oil prices rising to over $100 a barrel, TotalEnergies appears to be accelerating its investment in non-carbon energy options. It also increased its dividend by 5% this year, so investors haven’t given up on dividend growth here.
TotalEnergies’ dividend yield, meanwhile, is a generous 4.7%. This is towards the high end of the peer group. Investors looking for a high-yielding oil name that moves with the energy market would do well to take a closer look. That said, TotalEnergies is French, so US investors must pay foreign taxes on dividends, although you may recover some of it when you file your taxes.
2. Get back on track
As noted, Shell cut its dividend in 2020 announcing a clean energy pivot. However, a key part of the plan was to quickly return to dividend growth. Management has delivered on that commitment by making several dividend hikes since the 2020 cut. The cut dropped the quarterly payout from $0.47 per share to $0.16. In the first quarter of 2022, it was $0.25 per share. It’s clearly a long way from where it once was, but the management is also clearly focused on delivering on its promise. In fact, the dividend has increased by 56% in just two years!
The current dividend yield is around 3%. It’s not huge and it’s, in fact, at the low end of the major oil peer groups. However, dividend growth has been well above that of the group and, given the drastic reduction, it could remain high for a little longer. This should appeal to those with a penchant for dividend growth who want to enter the oil space. But what’s really exciting here is that Shell, like TotalEnergies, is investing a good amount of money in a cleaner energy future. This means clean alternatives like solar and wind power, among others. Shell is also foreign, so US investors will have to pay foreign taxes on dividends.
The big advantage, however, is that Shell is using the monetary windfall of high oil prices to both expand beyond oil and reward investors with a return to dividend growth.
3. Forget energy prices
So far, we’ve looked at two oil and gas producers that outperform and underperform on often volatile commodity swings. Master Limited Partnership (MLP) Enterprise Products Partners avoids this complication by operating a massive intermediate portfolio. Essentially, it owns the pipelines, storage, processing and transportation assets that move oil from where it is drilled to where it is consumed in the world. It is a highly profitable activity, so the demand is more important than the price of oil or natural gas.
Currently, Enterprise’s proposed payout yield is 6.6%. This payment, meanwhile, has been increased every year for 23 consecutive years. Recent increases have been modest, so don’t expect Shell-like payout growth. But if slow and steady is your thing, then Enterprise is an energetic name worth taking a closer look at.
That said, it is not as aggressive on clean energy as TotalEnergies or Shell. But carbon fuels are expected to remain a major part of the global energy pie for decades to come, so that’s not a bad thing in and of itself. You just need to understand the larger dynamics – an ever-growing world population will need an “all of the above” approach that suggests a rapid shift to clean energy is highly unlikely. Thus, demand for Enterprise pipes should remain robust for longer.
There are plenty of options
Oil prices may have taken off, but that doesn’t mean you can’t find solid long-term investment ideas in the oil sector. Just go there with a different mindset. TotalEnergies is a high-efficiency energy transition player using today’s high energy prices to pursue its clean energy diversification plans. Shell is working in a similar direction, but its dividend cut has left it with a lower yield and a faster growing dividend. Enterprise avoids all of that with a paid wallet that will likely continue to lose money for years to come.
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Reuben Gregg Brewer holds positions at TotalEnergies. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.