These three stocks offer investors huge dividend potential for years to come. The Global X MLP ETF(NYSEMKT: MLPA) invests in master limited partnerships (MLPs) in midstream pipelines and storage. In the meantime, Devon Energy(NYSE: DVN) And Diamondback energy(NASDAQ: FANG) Are there oil and gas exploration and production companies that will pour money in 2025 and use it to increase dividends for long-term investors.
Whether you voted for President Trump or not, he will take office in January. That’s good news for gas pipelines and storage companies, not least because the Trump administration has pledged to end the moratorium on new LNG export terminal permits imposed by the Biden administration.
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While investors may enjoy picking winners in the sector, the Global X MLP ETF offers an alternative option. Currently owns 20 MLPs with Energy transfer, Enterprise product partnersAnd MPLX each representing more than 10% of assets, the ETF offers a relatively stress-free way to gain broad exposure to midstream pipeline and storage companies.
In addition to the new government’s approach to LNG terminals, an increase in energy exploration and production is good news for energy infrastructure companies, as it increases the likelihood of production increases in the fields they serve. This helps reduce MLPs’ risks and improves their bargaining power when negotiating long-term contracts.
Image source: Getty Images.
This ETF, with a dividend yield of 8.3% and an expense ratio of 0.45%, is a buy for investors who are optimistic about the long-term future of US energy production.
I know what you’re thinking: Devon Energy didn’t pay a variable dividend in the third quarter, and the fixed quarterly dividend of $0.22 equates to an annual dividend of $0.88. That figure would put Devon at a dividend yield of just 2.3%, so how is Devon Energy a high yield stock?
The answer lies in understanding how to best return capital to shareholders over time. In a nutshell, Devon Energy’s management is currently using its substantial cash flow to reduce debt and buy back shares after paying its fixed quarterly dividend. It’s a strategy that makes sense when cash flow flows from good production and a relatively high oil price. The debt reduction will improve future cash flow, as interest on pension debt does not have to be paid, and the share buyback will reduce the number of shares, so existing shareholders will have a greater claim on future cash flow.
Putting some numbers on this argument, management believes it will have a free cash flow (FCF) yield of 9% in 2025, based on an oil price of $70 per barrel and the November 1 share price of approximately $38.32. Interpolation for the current stock price indicates an FCF yield of 8.9%. In theory, Devon could pay all of that out in dividends. However, management tends to return 70% of free cash flow to investors, with 30% going to improve the balance sheet (debt reduction).
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If 70% of the return is in the form of dividends, this means a dividend yield of 6.2%. That would be fine, but considering the shares transactions With such an attractive FCF yield, it makes more sense to use investors’ money to buy back shares that yield 8.9% in FCF.
As such, provided the FCF remains high, Devon will have ample potential to significantly increase its dividend, not least because the FCF per share will fall given the reduction in the number of shares.
Like Devon, Diamondback Energy did not pay a variable dividend in the third quarter. Like Devon, which acquired Bakken-focused Grayson Mill, Diamondback is expanding its production through a merger with Permian-focused Endeavor Energy (expected to close in the fourth quarter).
The parallels don’t end there. Diamondback also expects cash flow to increase in 2024, with management forecasting $3.4 billion in commodity currency prices. It is an FCF that represents 6.4% of the current market capitalization. The market likely values ​​Diamondback over Devon because of the Endeavor deal.
There is indeed good news on that front, as management recently cut the post-dividend oil breakeven price to $37 per barrel, down from an initial estimate of $40 per barrel.
Image source: Getty Images.
In layman’s terms, provided oil prices remain above $37 per barrel, Diamondback will be able to pay its base quarterly dividend of $0.90, or $3.60 per year. That equates to a dividend yield of 2%. But given that oil prices are currently around $70 per barrel and management is taking an opportunistic approach (much like Devon) in buying back shares when valuations are low or increasing the variable dividend where possible, the stock has plenty of potential. to grow the dividend in the coming years.
All told, the Global X MLP ETF now offers excellent dividend yields. If you believe energy prices will hold, Devon and Diamondback will likely return to raising their variable dividends in the future.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
3 High-Yield Energy Stocks That Are Crying to Buy Now was originally published by The Motley Fool
