These three stocks offer investors huge dividend potential for a few years. The Global X MLP ETF(NYSEMKT: MLPA) invests in master limited partnerships (MLPs) in midstream pipelines and storage. Meanwhile, Devon Energy(NYSE: DVN) and Diamondback Energy(NASDAQ: FANG) are oil and gas exploration and production corporations set to gush money in 2025 and use it to boost dividends for long-term investors.
Whether you voted for President Trump or not, he’ll take office in January. That is excellent news for gas pipelines and storage corporations, not least since the Trump administration has promised to finish the moratorium on recent LNG export terminal licenses imposed by the Biden administration.
Start Your Mornings Smarter! Get up with Breakfast news in your inbox every market day. Sign Up For Free »
While investors may enjoy picking winners within the sector, the Global X MLP ETF offers an alternate option. Currently holding 20 MLPs with Energy Transfer, Enterprise Product Partners, and MPLX each representing greater than 10% of assets, the ETF offers a comparatively stress-free strategy to get broad-based exposure to midstream pipelines and storage corporations.
Along with the brand new administration’s approach to LNG terminals, a rise in energy exploration and production is nice news for energy infrastructure corporations since it increases the likelihood of output increases within the fields they serve. That helps de-risk MLPs and improves their bargaining position when negotiating long-term contracts.
Image source: Getty Images.
This ETF, with an 8.3% dividend yield and an expense ratio of 0.45%, is a buy for investors who’re optimistic concerning the long-term way forward for energy production within the U.S.
I do know what you’re pondering: Devon Energy didn’t pay a variable dividend within the third quarter, and its quarterly fixed dividend of $0.22 equates to an annual dividend of $0.88. That figure would put Devon on a dividend yield of just 2.3%, so how is Devon Energy a high-yield stock?
The reply lies in understanding how capital is best returned to shareholders over time. In a nutshell, Devon Energy’s management is currently using its substantive money flow to cut back its debt and make share buybacks after it pays its quarterly fixed dividend. It’s a technique that is smart when it’s gushing money flow from good production and a comparatively high price of oil. The debt reduction will improve future money flow because it won’t should pay the interest on the retirement debt, and the share buybacks will lower the share count, so existing shareholders can have a more significant claim on future money flow.
Putting some numbers to this argument, management believes it would have a free money flow (FCF) yield of 9% in 2025 based on a price of oil of $70 a barrel and the stock price on Nov. 1 of around $38.32. Interpolating for the present stock price suggests an FCF yield of 8.9%. In theory, Devon could pay all of that in dividends. Nonetheless, management tends to return 70% of FCF to investors, with 30% earmarked to enhance its balance sheet (debt reduction).
Image source: Getty Images.
As such, if 70% of returns are in the shape of dividends, this suggests a 6.2% dividend yield. That might be fantastic, but on condition that the stock trades on such a gorgeous FCF yield, it makes more sense to make use of investors’ money to purchase back stock yielding 8.9% in FCF.
As such, provided FCF stays high, Devon can have loads of potential to extend its dividend significantly, not least as FCF per share will drop given the share count reduction.
In common with Devon, Diamondback Energy didn’t pay a variable dividend within the third quarter. Also in common with Devon, which acquired Bakken-focused Grayson Mill, Diamondback is expanding its production through a merger with Permian-focused Endeavor Energy (expected to shut within the fourth quarter).
The parallels don’t stop there. Diamondback also expects to gush money flow in 2024, with management forecasting $3.4 billion at commodity currency prices. It’s an FCF representing 6.4% of the present market cap. The market is probably going valuing Diamondback over Devon because of the Endeavor deal.
Indeed, there’s excellent news on that front, with management recently lowering its post-dividend breakeven price of oil to $37 a barrel from an initial estimate of $40 a barrel.
Image source: Getty Images.
In plain English, provided the worth of oil stays above $37 a barrel, Diamondback will have the opportunity to pay its base quarterly dividend of $0.90, or $3.60 a yr. That equates to a 2% dividend yield. Nonetheless, on condition that the worth of oil is currently around $70 a barrel, and management takes an opportunistic approach (just as Devon does) in making share buybacks when its valuation is low or increasing its variable dividend where possible, the stock has loads of potential to grow its dividend in the approaching years.
All told, the Global X MLP ETF offers excellent dividend yields now. If you happen to imagine energy prices will delay, then Devon and Diamondback are more likely to return to increasing their variable dividends in the long run.
Before you purchase stock in Devon Energy, consider this:
The Motley Idiot Stock Advisor analyst team just identified what they imagine are the 10 best stocks for investors to purchase now… and Devon Energy wasn’t certainly one of them. The ten stocks that made the cut could produce monster returns in the approaching years.
Consider when Nvidia made this list on April 15, 2005… in case you invested $1,000 on the time of our advice, you’d have $870,068!*
Stock Advisor provides investors with an easy-to-follow blueprint for achievement, including guidance on constructing a portfolio, regular updates from analysts, and two recent stock picks every month. TheStock Advisorservice has greater than quadrupled the return of S&P 500 since 2002*.
Lee Samaha has no position in any of the stocks mentioned. The Motley Idiot recommends Enterprise Products Partners. The Motley Idiot has a disclosure policy.
