As a dividend growth investor, I look to diversify my portfolio by investing in different sectors. Doing so helps to mitigate risk. Some sectors perform better than others in different economic conditions. Consider the following chart that ranks the historical performance of each GICS sector and the S&P 500 since 2007. The sectors that outperformed the S&P 500 varies from year to year.
Since we don’t know which sectors will outperform the S&P 500 this year and in future years, it is sensible to consider investing in different sectors.
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In this article series, I present the top-ranked dividend growth stocks in each GICS sector. My watch list for candidates is Dividend Radar, a list of stocks trading on U.S. Exchanges with dividend increase streaks of at least five years. The list is updated and published every Friday and is available for download here. The latest edition (dated July 2, 2021) contains 761 stocks and 22 Energy sector stocks.
This article presents the seven top-ranked dividend growth stocks in the Energy sector. Here are the previous articles in this series, in case you missed them:
- 7 Best Communication Services Sector Dividend Stocks
- 7 Best Consumer Discretionary Sector Dividend Stocks
- 7 Best Consumer Staples Sector Dividend Stocks
The Energy Sector
Companies within the Energy sector are directly or indirectly involved in producing and distributing the energy needed to power the economy. Energy companies are sometimes categorized based on how the energy is sourced, either from renewable or non-renewable sources. The Energy sector includes companies involved with oil and gas drilling and production, pipeline and refining, mining, renewable energy, and specialty chemicals.
Sector and Performance Comparison
Let’s compare the sector averages and historical performance of the GICS sectors over different periods to see how the Energy sector compares:
The table is color-coded to show the highest (green) and lowest (red) values in each column. At 6.02%, the Energy sector has the highest average yield of the GICS sectors. It also has the highest average Beta (1.17). This sector has performed poorly in the recent past, as evidenced by its 3-Yr and 5-Yr performance columns.
Sector performance charts give another interesting perspective, especially when comparing those performances to the performance of the S&P 500:
The Energy sector is the only sector with negative returns over the past five years. Looking at the 1-year time frame, we see that the Energy sector has slightly outperformed the S&P 500.
I use DVK Quality Snapshots to assess the quality of dividend growth stocks. To rank stocks, I sort them by descending quality scores, breaking ties by using the following factors, in turn:
- SSD Dividend Safety Scores
- S&P Credit Ratings
- Dividend Yield
I rarely need to break ties with Dividend Yield.
DVK Quality Snapshots is an elegant and practical system, which I’ve used with great effect since 2019 in managing my DivGro portfolio. I use a rating system that maps directly from the quality scores:
Ratings are Exceptional (25), Excellent (23-24), Fine (19-22), Decent (15-18), Poor (10-14), and Inferior (0-9). Investment Grade ratings have quality scores in the range of 15-25, while Speculative Grade ratings have quality scores below 15.
Top-Ranked Energy Sector Stocks
Here are the seven top-ranked dividend growth stocks in the Energy Sector:
Note that I’m long CVX in my DivGro portfolio.
1. Chevron Corporation (CVX)
Founded in 1984 and based in San Ramon, California, CVX is a multinational energy corporation involved in all aspects of the oil and gas industries, including exploration and production; refining, marketing and transport; chemicals manufacturing and sales; and power generation. CVX is the fifth-largest integrated energy company with operations in about 180 countries.
2. Enterprise Products Partners L.P. (EPD)
Founded in 1968 and based in Houston, Texas, EPD provides midstream energy services to producers and consumers of natural gas, natural gas liquids, crude oil, petrochemicals, and refined products. EPD operates through four segments: NGL Pipelines & Services; Crude Oil Pipelines & Services; Natural Gas Pipelines & Services; and Petrochemical & Refined Products Services.
3. ConocoPhillips (COP)
COP explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids worldwide. The company primarily engages in conventional and tight oil reservoirs, shale gas, heavy oil, liquefied natural gas, oil sands, and other production operations. COP was founded in 1917 and is headquartered in Houston, Texas.
4. Magellan Midstream Partners, L.P. (MMP)
Founded in 2000 and headquartered in Tulsa, Oklahoma, MMP is a publicly traded partnership engaged in the transportation, storage, and distribution of refined petroleum products and crude oil in the United States. MMP owns the longest refined products pipeline in the USA, with access to about half of the nation’s refining capacity.
5. Enbridge Inc. (ENB)
Founded in 1949 and headquartered in Calgary, Canada, ENB is an energy transportation and distribution company with operations in the United States, Canada, and internationally. The company operates the world's longest crude oil and liquids pipeline system. ENB owns and runs Canada's largest natural gas distribution company.
6. Exxon Mobil Corporation (XOM)
XOM is the world's largest publicly traded international oil and gas company. Founded in 1882 and based in Irving, TX, the company is engaged in oil and natural gas exploration and production, petroleum products refining and marketing, chemicals manufacture, and other energy-related businesses. The majority of XOM's earnings come from operations outside the United States.
7. Imperial Oil Limited (IMO)
Incorporated in 1880 and headquartered in Calgary, Canada, IMO is a subsidiary of Exxon Mobil Corporation. The company’s Upstream segment explores for and produces crude oil, natural gas, synthetic oil, and bitumen. IMO’s Downstream segment transports and refines crude oil, while its Chemical segment manufactures and markets various petrochemicals and polyethylene.
Please note that these stocks are candidates for further analysis, not recommendations.
Key Metrics and Fair Value Estimates
Below, I present key metrics of interest to dividend growth investors, along with quality indicators and fair value estimates. These include the dividend increase streak (Yrs), the DVK quality score (Qual.), the dividend Yield for a recent Price, and the 5-year compound annual dividend growth rate (5-Yr DGR).
I also provide fair value estimates (Fair Val.) to help identify stocks trading at favorable valuations. The last column shows the discount (Disc.) or premium (Prem.) of the recent price to my fair value estimate.
To estimate fair value, I reference fair value estimates and price targets from several sources, including Morningstar and Finbox. Additionally, I estimate fair value using each stock’s 5-year average dividend yield using data from Simply Safe Dividends. Finally, with several estimates and targets available, I ignore the outliers (the lowest and highest values) and use the average of the median and mean of the remaining values as my fair value estimate.
The top-ranked Energy sector stocks are all rated Decent (quality scores 15-18). Due to the increased investment risk, I look for higher yields and dividend growth rates when investing in stocks with lower quality scores.
I own only one of these stocks, CVX, which happens to be ranked #1. In fact, my portfolio is underweight in the Energy sector, as I own only one other Energy sector stock, Valero Energy Corporation (VLO), ranked #11 of the Energy sector stocks.
CVX yields a generous 5.23%, but its 5-year DGR is relatively low at 3.8%. The company has a distinguished dividend history, with 34 consecutive years of higher dividend payouts! This streak of dividend increases makes CVX a Dividend Aristocrat and a Dividend Champion.
EPD and MMP are master limited partnerships (MLPs) that combine the tax benefits of a private partnership with the liquidity of a publicly traded company. The favorable tax treatment allows MLPs to pay higher distributions, and EPD (7.52%) and MMP (8.59%) are no exceptions. Both are Dividend Contenders with annual increase streaks of 24 and 19 years, respectively.
I no longer invest in MLPs directly.
While MLPs are tax-efficient for investors, their tax filing requirements are complex. MLPs must send unitholders an IRS Schedule K-1 form detailing income, deductions, credits, and other items. Unitholders (or the tax professional they hire) must process their K-1’s to determine tax obligations. In my experience, K-1’s often arrive late and are amended one or more times.
Another drawback of MLPs is their limited upside potential, historically. Perhaps this is to be expected from an investment that produces a reliable income stream year after year.
I previously owned XOM but closed my position in late December 2020 to harvest tax losses. The company’s poor performance was disappointing, as is its lack of leadership in addressing issues related to climate change.
While Wall Street analysts appear to be turning positive on XOM after a brutal year, some experts warn that things could get much worse. According to Clark Williams-Derry, an energy finance analyst at the Institute for Energy Economics and Financial Analysis:
Instead of reinvesting in XOM, I’ve decided to stick with CVX with its comparable yield and growth rate metrics.
Dividend Challenger ENB is worth considering, in my view, despite its Borderline Safe Dividend Safety Score of 57. The stock yields 6.91% and has an impressive 5-year DGR of 10.8%. Moreover, ENB is trading at a discount of 11% to my fair value estimate. While past performance is no predictor of future returns, ENB has easily outperformed the other Energy sector stocks over the past 20 years:
Unlike Exxon, Enbridge is active in developing its renewable energy business, which is a sizeable business that the company is growing aggressively. ENB could benefit from a growing ESG investment trend and could generate annualized shareholder returns of about 15% going forward.
Below is a yield channel chart of ENB, indicating the stock is trading well below historical yield patterns:
COP and IMO do not interest me at this time. In my view, their relatively low yields would not adequately compensate investors for buying stocks rated Decent.
This article presented the seven top-ranked dividend growth stocks in the Energy sector.
All seven stocks are discounted, and most of them offer generous yields. I’m looking to add about 50 shares to my CVX position, while ENB presents an intriguing opportunity to add a high-yielding stock to my DivGro portfolio. Doing so certainly would improve my Energy sector exposure a bit!
Next time, we’ll look at the best Financials sector stocks.
Thanks for reading!
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