Crude supply has been normalizing, which has pushed the price of WTI and Brent to new three-year highs. More importantly, most companies are now able to cover their investment and payouts with cash from operations — something investors really want right now. In fact, riding on improving commodity prices, stronger production outlook and healthier cash flows, the companies look poised to continue the momentum in the coming years.
However, despite these positives, it’s difficult for oil prices to reach 2014 levels for quite some time. So, picking dividend growth stocks appears to be a winning strategy currently as these 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.
Dividend Cuts & Leaner Strategies to Survive the Slump
Following the supply glut and lackluster global demand, oil prices remained low for more than three years. From $100 a barrel in 2014, crude spectacularly fell to a low of $30 in 2016. During the industry downturn, the energy companies adopted cost-cut strategies and realigned their business models to a leaner and efficient structure to stay competitive in the long run.
The companies engaged in reducing headcount, streamlining operations, divesting non-core projects, slashing capex and operating costs to adapt to the weak pricing environment and bolster financials. In fact, in many cases, the companies first resorted to dividend cuts to shore up the cash flows in order to fund the in-process growth projects.
The downturn not only impacted the smaller and the more-leveraged companies, it also affected the fairly larger companies (generally considered safe haven investments). They were forced to cut or suspend cash dividend and share buyback programs.
Pricing Gains & Robust Cash Flows Ease Dividend Payout Pressure
Thanks to rebounding oil prices and strategic initiatives, many energy companies have finally managed to come out of the slump. With the crude markets having recovered from the historic lows and comfortably trading above $60 a barrel for a couple of months now, the impact of improving energy landscape is clearly visible on the energy sector. Moreover, the uptrend is expected to continue on the back of tightening supplies, rising demand and OPEC-deal extension talks.
Importantly, cash flow from operating activities, which is a key metric to gauge the financial health of the firms, was the highest in 2017 since the downturn period. The companies generated enough cash to pay off debt along with funding capex and dividend payments. Further, the energy stocks look poised for further growth and greater investor rewards. The companies are set for more cash generation and the top priorities of the CEO’s are shifting from cost-containment efforts to boosting shareholder value.
Dividend Investing in Focus
As evident from the energy market story, stocks can take a sudden turn for the good (or bad), making stock picking a risky game. With uncertainty ruling the markets, it is not surprising that dividend investing, in general, is one of the most popular investing themes. In particular, given the robust fundamental backdrop and the high cash flow momentum, which we expect to further strengthen over the course of this year, now seems just the right time to invest in some high-octane dividend stocks.
In fact, dividend investing continues to be, as it always has been, a legitimate strategy. While picking the dividend stocks, it is best to pick the ones that have high yields and pay dividends consistently.
Stocks that have a strong history of dividend growth generally act as a hedge against economic or political uncertainty as these belong to mature companies, which are less susceptible to large swings in the market while simultaneously offer downside protection with consistent increase in payouts. Further, a history of strong dividend growth indicates that dividend increase in the future is likely. This makes the portfolio healthy and safe. All these make dividend growth a quality and promising investment metric for the long term.
Picking the Right Way
Targeting dividend stocks and combining them with a strong Zacks Rank is a great way to increase the chances of beating the market, while also ensuring a steady stream of cash heading to your portfolio. Further, we prefer to choose stocks that have high market capitalizations, which provide for a safer and a more reliable backbone to any portfolio. These large cap companies enjoy leading market positions, have a global footprint, strong cash positions and are large enough to remain stable even in the face of unfavorable events.
Thus, using the Zacks Stock Screener we have zeroed in on three large-cap stocks (which according to our model have a market cap of more than $5 billion) in the Zacks Oil-Energy Sector, with a favorable Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
These stocks not only offer current dividend yield of more than 4% but also have a five-year historical dividend growth of greater than 1% to reflect their solid dividend growth history.
BP plc (BP - Free Report) : Based in London, it is among the leading integrated energy players in the world with a market cap of more than $130 billion. This Zacks Rank #2 stock sports a robust dividend yield of 6.12%, highest among the top-integrated energy stocks. The company has continued paying dividend over the past several years amid the ongoing oil price volatility and has also performed well on the earnings front. The supermajor’s five-year historical dividend growth is 1.9%. The stock has gained about 14.7% over a year, outperforming the industry’s gain of 6.7%.
Royal Dutch Shell plc (RDS.A - Free Report) : The Hague-based supermajor is a Zacks Ranked #2 company with a market cap of more than $260 billion. For 2017, the Anglo-Dutch company generated an impressive $27.6 billion in free cash flows, the most by any supermajor and has been consistently paying dividends for the past several years. The company offers a dividend yield of 5.14% with five-year historical dividend growth of 1.2%. The stock has moved up 18.7% over a year, outperforming the industry’s gain of 6.7%.
Helmerich & Payne, Inc. (HP - Free Report) : The Tulsa-based drilling contractor is also a Zacks Rank #2 company, having a market cap of more than $6 billion. Helmerich & Payne’s technologically-advanced FlexRigs have been able to maintain relatively strong daily-rate margins even during times of market uncertainty. The company has a long history of dividend growth with impressive five-year historical dividend growth of 22.4%. It currently offers a dividend yield of 4.3%. The stock has lost around 8% over a year, narrower than the industry’s decline of more than 25% during the same period.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>