Last year turned out to be epic for U.S. stocks. The market’s relentless rally catapulted the key S&P 500 Index to new heights, logging its best year since 2013. As a matter of fact, the broadest measure of the equity market added as much as 28.9% to its value in 2019. But even as the books closed for a record-setting 2019, energy stocks remained the year’s big laggards.
Energy: The Worst-Performing S&P Sector
It was a wild ride for the energy market in 2019, setting pulses racing of even the steadiest investors. While major averages enjoyed their best year in nearly a decade, Energy was the least successful S&P 500 sector in 2019 with majority stocks in the Energy Select Sector SPDR Fund (XLE) languishing in bearish zone.
Let’s discuss the 2019 performance of oil and gas in detail:
Oil posted 34.5% rise last year - the biggest annual increase since 2016. In particular, WTI, the U.S. benchmark, jumped nearly 11% in December, aided in part by the agreement on a phase one trade deal between U.S. and China. The development – coming after months of wrangling – is seen to prop up the oil demand outlook on the back of revival in global economic growth. Also boosting oil, the OPEC+ group announced cutting output by as much as 500,000 barrels per day from Jan 1 for three months.
However, the improving oil market notwithstanding, WTI crude averaged $56.74 in 2019, around $8-a-barrel lower than the 2018 average of $65.06. This was mainly down to mounting concerns over wilting global demand due to trade war-induced slowdown at a time when U.S. shale output surge had heightened oversupply fears significantly.
Meanwhile, no major commodity had a worse 2019 than natural gas. The fuel endured a torrid year, registering its worst annual decline since 2014. Prices tumbled more than 25% last year, falling to multi-year lows of around $2.1 per MMBtu in between, as buyers fled the market over growing worries about record output, soaring flaring levels and concerns of an ongoing supply glut.
2020 Expected to be a Tumultuous Year for Energy Investors
There are too many variables to make an educated guess as to the price of oil and natural gas going forward. In fact, more wild market swings appear imminent in 2020.
With oil, conflicting economic data and geopolitical issues may lead to increased volatility in the markets. As we found out with the recent U.S.-Iran standoff, prices rallied to multi-month highs, pushed up by concerns that escalating tensions in the Middle East could lead to supply disruptions, only to spiral downward again when sentiment shifted.
On the other hand, natural gas might experience short-lived surge based on positive weather forecasts but any powerful turnaround looks unlikely at the moment. With gas output in the lower 48 states recently hitting a record 92.8 Bcf per day, there is little room for prices to improve meaningfully from their current levels of $2.13 per MMBtu.
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 further adds to the risk.
Dividend Investing to the Rescue
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 the investors’ preferred choice as they provide steady income and cushion against market risks. These stocks – displaying solid financial structure and healthy underlying fundamentals – are generally less volatile in nature and hence, are dependable when it comes to long-term investment planning. Moreover, they are proven outperformers over the long term and a safe bet to create wealth while offering sizable yields on a regular basis.
How to Pick the Best 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 in order to select the best dividend stocks with potential for steady returns.
To guide investors to the right picks, we highlight five stocks that carry a Zacks Rank of #1 (Strong Buy) or 2 (Buy). The Zacks Rank is a reliable tool that helps you trade with confidence regardless of your trading style and risk tolerance. To learn more about how you can use this proven system for market-beating gains, visit Zacks Rank Education.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Finally, the stocks, which we shall cherry-pick, offer current dividend yield of more than 5%.
Most of them are energy infrastructure master limited partnerships (or MLPs). The assets that these partnerships own typically – oil and natural gas pipelines and storage facilities.
MLPs represent an attractive investment option for income-focused investors in the current environment. In addition to high yields, MLPs are structured as pass-through entities.
This means that they typically distribute nearly all of their cash flows back to unitholders. The MLPs are not required to pay a corporate income tax as the tax liability of the entity is passed on to its owners (or unitholders) in the form of a cash dividend (distribution). This allows the MLPs to offer very attractive yields to the investors.
5 Energy Stocks to Invest In
CNX Midstream Partners LP is a natural gas midstream company that owns and operates gathering and other assets in the Marcellus Shale and Utica Shale in Pennsylvania and West Virginia. CNX Midstream Partners carries a Zacks Rank #1 and boasts of a distribution yield of 9.7%.
Crestwood Equity Partners LP CEQP is a natural-gas focused midstream player with operations in the Bakken and Barnett shales, the Permian basin, and the Marcellus. With a Zacks Rank of 1, the partnership gives a chance to lock in 7.6% yield.
Rattler Midstream LP RTLR is oil and gas gathering and takeaway master limited partnership, whose operations are spread over the Permian’s Midland and Delaware basins. The #2 Ranked stock midstream operator’s estimated distribution yield is around 8%.
Enbridge Inc. ENB is a premier energy infrastructure provider in North America. The Canada-based company, with a dividend yield of 5.6%, sports a Zacks Rank #2.
EQM Midstream Partners, LP EQM is a natural gas distributor in the Appalachian Basin. The firm is yielding over 16% and carries a Zacks Rank #2.
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
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