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The Energy sector is renowned for its inherent volatility, characterized by abrupt positive upswings and crashes. While dramatic price fluctuations have long been a hallmark of oil and natural gas investments, the level of uncertainty has significantly escalated in recent years, particularly in the aftermath of the COVID-19 pandemic.
In an erratic energy market setting, you might consider high-quality dividend stocks like HF Sinclair DINO, ExxonMobil XOM and Diamondback Energy FANG to fetch a promising income stream.
The Allure of Dividend Stocks to Navigate Unpredictable Energy Prices
In the tumultuous energy market journey, crude oil swung from a historic low of minus $38 a barrel in April 2020 to a remarkable high exceeding $130 per barrel in March 2022. However, recent times have proven challenging for "black gold." Concerns about demand and global economic slowdown led to a slump, though prices rebounded to nearly $80 following anticipated OPEC+ production cuts.
Natural gas mirrored this volatility, hitting a 25-year low in June 2020, surging to $10 per MMBtu in August 2022, and now trading below $3 due to mild winter forecasts and ample supplies.
The unpredictability of stocks, influenced by sudden market shifts, underscores the risk in stock picking. Amid Wall Street's uncertainty, dividend investing has gained prominence. Dividend stocks offer a reliable income stream, acting as a cushion against market risks. Known for lower volatility, they are a dependable choice for long-term investment, providing not only a steady income but also protection against equity market uncertainties.
Investors favor dividend stocks for wealth creation, as regular payouts act as a hedge in times of economic uncertainty, offering consistent yields. Additionally, the growth of dividends serves as a strategy to counteract the value erosion amid the current high inflationary environment. In the face of market unpredictability, the allure of dividend stocks remains a steadfast strategy for investors seeking stability and income in their portfolios.
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 are recommending stocks with a payout ratio of less than 60 and a dividend yield of at least 2%. Moreover, these companies have hiked their dividends over the past five years.
Calculated by dividing dividend per share by earnings per share, the payout ratio indicates how comfortably a firm can pay the dividend from its earnings. It is one of the key metrics that dividend growth investors consider when looking for potential investments. A payout ratio below 60 looks quite sustainable and leaves enough scope for future dividend hikes.
With our objective to build a dividend income portfolio, we look for companies that have at least better yields 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.
Finally, we only consider stocks that have a consistent dividend, i.e., paying and increasing offerings 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.