Three High-Earning Energy Stocks that Present Attractive Purchase Opportunities Currently
Three High-Earning Energy Stocks that Present Attractive Purchase Opportunities Currently
Three investments provide substantial dividend prospects for numerous years. The Global X MLP ETF (MLPA -0.93%) invests in master limited partnerships (MLPs) dealing with midstream pipelines and storage, specifically in sectors like midstream pipelines and storage. Concurrently, Devon Energy (DVN -1.84%) and Diamondback Energy (FANG -0.74%) focus on oil and gas exploration and production, set to produce wealth in 2025 and increase dividends for long-term investors.
The Global X MLP ETF, a favorable choice for the new administration
Regardless of political affiliation, the new president will take office in January. This can bring positive implications for gas pipelines and storage companies, especially as the Trump administration plans to repeal the moratorium on new LNG export terminal licenses implemented by the Biden administration.
Investors can seek opportunities in this sector, but the Global X MLP ETF provides an alternative. Currently holding 20 MLPs, with Energy Transfer, Enterprise Product Partners, and MPLX representing more than 10% of assets each, this ETF enables investors to acquire broad-based exposure to midstream pipelines and storage companies without extra hassle.
Besides the new administration's position on LNG terminals, an increase in energy exploration and production will benefit energy infrastructure companies by increasing the likelihood of output enhancements in the fields they serve. This reduces the risk associated with MLPs and strengthens their negotiating power for long-term contracts.
The ETF offers an attractive 8.3% dividend yield and a low expense ratio of 0.45%, making it a strong choice for investors optimistic about US energy production's long-term future.
Devon Energy's long-term capital gains
While Devon Energy didn't pay a variable dividend in the third quarter and its quarterly fixed dividend of $0.22 corresponds to an annual dividend of $0.88, or a 2.3% dividend yield, it still presents high-yield investment opportunities.
Devon's management uses the company's substantial cash flow to reduce debt and repurchase shares after paying its quarterly fixed dividend. This strategy can be beneficial when cash flow from profitable production and a high oil price is surplus.
Devon expects to achieve a 9% free cash flow yield in 2025, based on an oil price of $70 per barrel and a stock price of $38.32 as of Nov. 1. The potential for paying all of this profit to shareholders as dividends is theoretical, but management typically returns 70% of free cash flow to shareholders, while allocating 30% for debt reduction.
Given that 70% of returns are distributed as dividends, this implies a 6.2% dividend yield. While that sounds acceptable, considering the stock's present attractive free cash flow yield, it's more logical to allocate investor funds towards stock buybacks, offering a yield of 8.9%.
As long as free cash flow remains high, Devon's potential to boost dividends significantly is enormous, especially as free cash flow per share decreases due to share buybacks.
Diamondback Energy: A strategy in harmony with Devon
Similar to Devon, Diamondback Energy also didn't pay a variable dividend in the third quarter and is planning to expand production through a merger with Permian-focused Endeavor Energy (expected to close in the fourth quarter).
Diamondback also anticipates generating substantial cash flow in 2024, with management forecasting $3.4 billion at commodity currency prices. This represents an FCF representing 6.4% of the current market cap. Due to the Endeavor deal, investors value Diamondback higher than Devon.
Positive news comes from management, who recently lowered the post-dividend breakeven price of oil to $37 a barrel from an initial estimate of $40 a barrel. This implies that if the price of oil stays above $37 a barrel, Diamondback will be able to meet its base quarterly dividend of $0.90, or $3.60 per year. That equates to a 2% dividend yield. However, given the current high oil price of around $70, and its opportunistic approach to share buybacks at lower valuations or increasing variable dividends where possible, the potential for growth in dividends near-term remains high.
Overall, the Global X MLP ETF has attractive dividend yields now. If energy prices prove sustainable, both Devon and Diamondback have potential to boost their variable dividends in the future.
Investors looking beyond the energy exploration and production sector might consider diversifying into related finance opportunities, such as investing in the Global X MLP ETF. With its extensive holdings in midstream pipelines and storage companies like Energy Transfer, Enterprise Product Partners, and MPLX, the ETF provides a convenient way to gain exposure to this lucrative sector while benefiting from its high 8.3% dividend yield and low expense ratio.
Now, let's consider Devon Energy's dividend growth potential. While its dividend yield is currently 2.3%, the company's strong cash flow and management's dedication to return 70% of this cash flow to shareholders as dividends suggests a potential for higher dividends in the future. If Devon Energy can maintain or even enhance its current production levels and achieve its projected free cash flow yield of 9% in 2025, their dividend payouts could experience significant growth.