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Wary of Energy Volatility? 4 Dividend Stocks to the Rescue

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The Energy sector is infamous for being notoriously volatile, with sudden positive surprises and crashes. While wild price moves have always been integral to investment in oil and natural gas, the quantum of uncertainty has increased manifold in recent years, especially post-COVID.

Amid an erratic energy market setting, investing in high-quality dividend stocks like HF Sinclair (DINO - Free Report) , ExxonMobil (XOM - Free Report) , Valero Energy (VLO - Free Report) and Diamondback Energy (FANG - Free Report) might fetch you promising returns.

Use Dividend to Shield From Unpredictable Energy Prices

From the depths of minus $38 a barrel during the height of the pandemic in April 2020 to a 14-year high surge of above $130 per barrel this March and finally around $90 now, crude has been on a roller-coaster ride over the past few years. It’s no different for natural gas either. The fuel slumped to a 25-year low in June 2020 but recently topped $9 per MMBtu for the first time since 2008. Diverse factors ranging from demand/supply fundamentals to economic events to geopolitical shocks influence commodity prices realizations.  

As evident from the energy market story, stocks can take a sudden turn for the good (or bad), making stock picking a risky game. Every good stock also has its bad day, which adds to the risk. With uncertainty ruling the markets, it is not surprising that dividend investing has emerged as one of the most popular investing themes.

Dividend stocks are always investors’ preferred choices as they provide steady income and cushion against market risks. These stocks are generally less volatile in nature and hence, are dependable when it comes to long-term investment planning. They not only offer higher income in the current environment — where rates remain low despite further hikes around the corner — but also protect against equity market risks.

Dividend stocks are safe bets to create wealth, as the payouts generally act as a hedge against economic uncertainty and simultaneously provide downside protection by offering sizable yields on a regular basis. Finally, the dividend growth can also help investors to offset some of the value destruction of the high inflationary environment prevailing at the moment.

How to Pick the Best Dividend Stocks?

Although the benefits of dividend investing cannot be stressed enough, one should keep in mind that not every company can keep up with its dividend-paying momentum. Hence, a cautious strategy needs to be followed to select the best dividend stocks with the potential for steady returns.

To guide investors to the right picks, we have introduced certain screening parameters.

Payout Ratio is less than 60: Calculated by dividing dividend per share by earnings per share, it indicates how comfortably a firm can pay the dividend from its earnings. The payout ratio is one of the key metrics that dividend growth investors consider when looking for potential investments. A payout ratio below 60 not only looks quite sustainable but also leaves enough scope for future dividend increases.

Dividend Yield greater than or equal to 2%: With our objective to build a dividend income portfolio, we look for companies that at least have yields better than the S&P 500. A representative of the broader market, the index currently yields 1.42%. While our yield criterion  isn't very high, it’s at a level where the company can weather all kinds of commodity price environments and provide a reliable income stream to investors.

5-Year Historical Dividend Growth greater than or equal to 0.001: This leads us to companies that have paid and grown dividend over the past five years. It also acts as an indicator of what to expect from the company in the next few years on the payout front.

Our Choices

We have used the above criteria to narrow down five dividend-paying energy stocks.

HF Sinclair Corporation: A producer and marketer of gasoline, diesel fuel and other specialty products, HF Sinclair pays out a quarterly dividend of 40 cents ($1.60 annualized) per share that gives it a 3.07% yield at the current stock price. The Zacks Rank #1 (Strong Buy) company’s payout ratio is 21, with a five-year dividend growth rate of 3.62%. (Check HF Sinclair’s dividend history here)

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
 

HF Sinclair Corporation Dividend Yield (TTM)

HF Sinclair Corporation Dividend Yield (TTM)

HF Sinclair Corporation dividend-yield-ttm | HF Sinclair Corporation Quote

DINO is valued at some $11.3 billion. The Zacks Consensus Estimate for HF Sinclair’s 2022 earnings has been revised 46.4% upward over the past 60 days. The donwnstream operator has a trailing four-quarter earnings surprise of roughly 710.1%, on average. DINO shares have gained 87.3% in a year.

ExxonMobil: ExxonMobil is one of the largest publicly traded oil and gas companies in the world, which participates in every aspect related to energy — from oil production to refining and marketing. XOM’s dividend of 88 cents per share ($3.52 annualized) represents a 3.82% yield. The #1 Ranked ExxonMobil’s payout ratio is 36, with a five-year dividend growth rate of 2.80%. (Check ExxonMobil’s dividend history here)
 

Exxon Mobil Corporation Dividend Yield (TTM)

Exxon Mobil Corporation Dividend Yield (TTM)

Exxon Mobil Corporation dividend-yield-ttm | Exxon Mobil Corporation Quote

ExxonMobil is valued at some $384.3 billion. The Zacks Consensus Estimate for XOM’s 2022 earnings has been revised 21.2% upward over the past 60 days. ExxonMobil, headquartered in Irving, TX, has a trailing four-quarter earnings surprise of roughly 1.6%, on average. XOM shares have gained 73.3% in a year.

Valero Energy: Among all the independent refiners, Valero offers the most diversified refinery base with a capacity of 3.1 million barrels per day in its 15 refineries located throughout the United States, Canada and the Caribbean. VLO pays out a quarterly dividend of 98 cents ($3.92 annualized) per share which gives it a 3.33% yield at the current stock price. The Zacks Rank #2 (Buy) company’s payout ratio is 23, with a five-year dividend growth rate of 7.23%. (Check Valero Energy’s dividend history here)
 

Valero Energy Corporation Dividend Yield (TTM)

Valero Energy Corporation Dividend Yield (TTM)

Valero Energy Corporation dividend-yield-ttm | Valero Energy Corporation Quote

Valero is valued at some $46.4 billion. The Zacks Consensus Estimate for VLO’s 2022 earnings has been revised 56.9% upward over the past 60 days. The refining giant has a trailing four-quarter earnings surprise of roughly 33.5%, on average. VLO shares have gained 97.2% in a year.

Diamondback Energy: Diamondback Energy is an independent oil and gas exploration & production company with its primary focus on the Permian Basin. FANG’s dividend of $3.05 per share comprises 75 cents ($3 annualized) in regular payout, plus a variable cash component of $2.30 apiece. The regular component represents a 2.39% yield. The Zacks Rank #3 (Hold) Diamondback’s payout ratio is 15, with a five-year dividend growth rate of 57.26%. (Check Diamondback Energy’s dividend history here)
 

Diamondback Energy, Inc. Dividend Yield (TTM)

Diamondback Energy, Inc. Dividend Yield (TTM)

Diamondback Energy, Inc. dividend-yield-ttm | Diamondback Energy, Inc. Quote

Diamondback is valued at some $21.8 billion. For 2022, FANG has a projected earnings growth rate of 126%. Diamondback, headquartered in Midland, TX, has a trailing four-quarter earnings surprise of roughly 7%, on average. FANG shares have gained 91.6% in a year.