For long-term and value investors, dividend-paying stocks are a great way to compound gains, reduce risk and volatility and preserve the purchasing power of capital.
That’s a big reason why many retirees prefer steady-growth high-dividend stocks over sexier high-growth but more volatile growth stocks.
As a general rule of thumb, financial planners recommend following the 4% rule as a reliable guideline for determining the amount an investor can drawdown from their portfolios with minimal risk of depleting their nest egg over a 30-year post-retirement period.
It’s a simple concept: you are allowed to draw down 4% of your portfolio value during your first year in retirement, and a matching amount–adjusted for inflation–for each subsequent year.
High-yield dividend stocks fit well with this strategy since many have yields that easily exceed that threshold. With high–preferably growing–yield stocks, a minimal share price appreciation is usually enough to keep you on top of things.
Here are five high-yield oil stocks that fit the bill.
#1 Royal Dutch Shell Plc (NYSE:RDS.A, LON:RDSA)
Market Cap: $232.80B
Dividend Yield: 6.43%
Royal Dutch Shell is an Anglo-Dutch oil and gas company and the second-largest supermajor behind Exxon Mobil Corp. (NYSE:XOM). RDS shares are listed on the New York Stock Exchange and the London Stock Exchange. The company is the largest component in the FTSE 100 and the 26th most actively traded stock. The company’s 6.43% dividend yield ranks among the highest for the sector.
Shell is considered one of the most diversified integrated oil and gas companies thanks to the company’s long-term strategy of investing in three main business sectors: upstream, downstream and integrated gas. Notably, the company’s integrated gas business has lately emerged as a dominant sector helping replace downstream operations and bringing in the lion’s share of net income. This has helped Shell to realize a significant improvement in its returns on invested capital (ROIC). Further, Bloomberg has reported that the company’s relatively sophisticated refinery system puts it in a good position as the shipping industry starts to crack down on high-sulfur fuels. Related: This Large Oil Producer Is Facing A Major Refining Crisis
Like many energy companies, Shell posted lackluster third quarter earnings with revenue and net income contracting in double-digits. Nevertheless, the company’s lower unit development costs should contribute to lower break-even costs per barrel and help the company weather the storm.
#2 BP Plc (NYSE:BP, LON:BP)
Market Cap: $131.52B
Dividend Yield: 6.39%
This British multinational oil and gas company has dual listings on the New York Stock Exchange and the London Stock Exchange. Another dividend champ, BP’s 6.39% yield places it among the elite payers.
There are some quirks though behind the company’s generous dividends: Last year, BP distributed an unusually high 174% of its profit and 87% of free cash flow as dividends. Obviously, this trend is unsustainable over the long-term and places the dividend at high risk for a cut should profits or FCF deteriorate significantly. BP’s earnings have fallen at an average 28% clip over the past decade forcing the company to cut dividends by an average of 3.1% every year. With the company’s underlying replacement cost profit (a proxy for net income) declining 41 percent last quarter coupled with an over-leveraged balance sheet, there are not many prospects for the dividend to grow though it’s safe for now due to a healthy FCF.
On a brighter note, BP is no longer hobbled by the effects of the Gulf of Mexico oil spill–the company has had to take a tremendous $18.7B charge for that mishap. Further, the company seems to be laying a firm foundation for future growth after managing to bring 23 major projects online since it announced its 5-year growth plans two years ago.
#3 Enbridge Inc. (NYSE:ENB)
Market Cap: $76.39B
Dividend Yield: 5.88%
If you prefer an energy stock that offers a rare combination of high yield and growth, then look no further than Enbridge, a Canadian energy transportation company based in Alberta. Enbridge owns a network of transportation and storage assets that connect some of North America’s richest oil and gas fields. As low-cost shale drilling continues to grow the continent’s energy production volumes, Enbridge should be able to see healthy demand for its pipeline and transportation facilities.
This midstream energy company sports a healthy dividend yield with a target to grow the dividend at 10% per annum while at the same time maintaining an impressive distributable cash flow ratio of 1.4x forward dividend.
During its latest earnings call, Enbridge guided for full-year DCF above the midpoint of its earlier guidance of $4.30-$4.60. We can therefore surmise that the company remains on track to meet its goal for dividend growth.
#4 Exxon Mobil Corp. (NYSE:XOM)
Market Cap: $287.84B
Dividend Yield: 5.12%
Texas-based ExxonMobil Corp is a diversified oil and gas company and the largest of the oil supermajors. If Shell and BP are dividend champs, XOM is a dividend aristocrat. The company has not only paid an uninterrupted dividend for more than a century, but has raised its payout every single year over the last 36 years. Related: Oil Bounces Back On New Round Of OPEC Rumors
Exxon has been pursuing a rather ambitious growth plan as evidenced by its string of 14 oil discoveries off the coast of Guyana. The company also has a history of disciplined capital allocation, conservative use of debt, and complementary businesses less sensitive to commodity prices that help it weather the storm better than many of its peers when the markets turn choppy. Nevertheless, Exxon has not been spared the effects of weak energy prices with Q3 2019 revenue plunging 15%. Further, Moody’s has lowered the company’s credit rating from stable to negative citing the company’s ongoing high level of growth capital investments.
#5 Oneok, Inc. (NYSE:OKE)
Market Cap: $29.24B
Dividend Yield: 4.99%
ONEOK, Inc. is a diversified energy company based in Tulsa, Oklahoma. The company is a major midstream service provider in the natural gas sector with one of the largest natural gas liquids (NGL) systems in the United States. Oneok’s processing facilities, pipelines and storage assets help to connect NGL supply zones to major market hubs.
In recent years, management has been making concerted efforts to improve the stability of the company. To wit, in a bid to minimize direct exposure to commodity price volatility, Oneok generates ~90% of its earnings from recurring fee-based businesses up from 66% six years ago. The company has also successfully maintained an investment-grade rating with a target dividend coverage ratio more than 1.2x. That’s considered fairly conservative for this type of business and leaves room for future growth.
By Anes Alic for Oilprice.com
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