Energy Stocks Have Struggled. Why They’re Still Dividend Stalwarts.

“For income investors, these are definitely very attractive dividend yields,” says Ohsung Kwon, a U.S. equity strategist at BofA Securities, adding that “these dividends are pretty safe, as well.”

The payout ratio—the percentage of a company’s earnings paid out in dividends—of energy stocks in the S&P 500 is 37%, he says. That ratio is manageable with oil prices at current levels. Prices came under pressure after the onset of the Israel-Hamas war and turmoil in the Red Sea. But lately they’ve been fairly steady in the mid-$70s a barrel range.

“The big players and even some of the mid-caps can cover their dividends down to about $40 oil,” says Sam Ensslin, an energy analyst and portfolio manager at Westfield Capital Management.

Energy stock performance, however, has fallen sharply over the past year. The Energy Select Sector SPDR exchange-traded fund returned 53% and 64% in 2021 and 2022, respectively, including dividends, lifted by rising oil prices. Last year it was down 0.6%, and in 2024 it is off by 0.5%.

Dividend policies vary markedly among energy companies. The megacap integrated majors such as Exxon Mobil and Chevron prefer to pay a fixed quarterly dividend and then raise it regularly, typically once a year. Exxon Mobil yields 3.7%; Chevron, 4.1%. Exxon Mobil recently paid a quarterly dividend of 95 cents a share, up 4.4% from 91 cents previously. Chevron’s latest dividend boost was about 6% to $1.51 a share.

These energy giants have historically grown their dividends “at about that same rate” and “anything they generate in excess of that they’ll return via buybacks, as opposed to stepping up the dividend growth,” says Ensslin.

But there have been some big changes occurring, especially among small- and mid-cap energy companies, in terms of how they pay out dividends. Capital allocation and spending priorities have gradually changed, says Kwon. “But it really shifted post-Covid when companies started to focus more on distributing cash to shareholders through buybacks and dividends, rather than spending on [capital expenditures],” he adds.

An outgrowth of this has been the concept of energy companies offering different types of dividends. One, known as the base dividend, is paid out every quarter. The payout of the second, which is variable, hinges on market conditions, notably energy prices.

For example, ConocoPhillips, a large, multifaceted energy company, paid out four quarterly dividends last year—three for 51 cents a share and one for 58 cents. On top of that, shareholders received three variable payouts, all for 60 cents.

Stephanie Link, chief investment strategist at Hightower Advisors, says she is overweight energy, at about 7% of her portfolio, roughly three percentage points above the broader market’s weighting. She concurs that energy companies have shifted from a boom-and-bust, capital-allocation approach to more of a focus on shareholder returns. “You’re getting some of the best-in-breed companies on sale,” she says, pointing to Exxon Mobil, which fetches about 11 times 2024 earnings estimates.

Link cites the diversification of the company’s revenue streams and its October announcement to buy Pioneer Natural Resources, an exploration and production company with a big presence in the Permian Basin. “This is the gem; this is where you want to be,” Link says of the fracking region.

Another big-cap energy company is SLB, previously known as Schlumberger. It’s a global oil-services company. The stock, which is off by about 5% this year, yields 2.3%. “Nobody knows more about the oil and gas business in the world than Schlumberger,” says Robert Robotti, chief investment officer at Robotti & Co., a investment advisory firm. “They do business with everybody.” SLB recently said it plans to raise its quarterly dividend by 10% to 27.5% a share.

Elsewhere, Occidental Petroleum only yields 1.5%, but the exploration and production company has been raising its payout, most recently to 22 cents a share on a quarterly basis, a 22% increase. The company has had to pay down a lot of debt following its $55 billion acquisition of Anadarko Petroleum in 2019.

As Barron’s reported recently, Warren Buffett’s Berkshire Hathaway upped its stake in Occidental to 28%.

Robotti also likes Canadian Natural Resources, which yields 4.5% and has regularly boosted its dividend. It’s an oil-and-gas production company with big operations in western Canada, among other places. The company has “a huge inventory of opportunities” for oil and gas development, Robotti says.

Charles Redding, a senior equity strategist at Truist Wealth, says that while relative energy stock performance has been mixed, refiners are one the best-positioned energy subsectors in this environment. He cites favorable spreads, which measure the cost of a refiner’s raw materials against the price of finished products.

Refiners include Valero Energy, which yields 3%. The company recently declared a quarterly dividend of $1.07 a share, up nearly 5% from $1.02.

Meanwhile, BofA’s Kwon sees energy stocks benefiting when the Federal Reserve starts to cut interest rates.

Kwon points out that investors have poured into money-market funds to capture attractive yields. But when rates do start to fall, investors are likely to look elsewhere. Energy stocks could be one option for income investors.

“The sector is yielding 3.5%. That’s pretty competitive with the Treasury market,” says Paul Hickey, co-founder of Bespoke Investment Group. The 10-year U.S. Treasury note’s yield was recently at 3.85% and falling.

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