By Tom Hutchinson, Chief Analyst, Cabot Income Advisor
The stock market was buoyed by an accommodative Fed for more than a decade. Now, not only are they taking that candy jar away, they are also moving aggressively in the opposite direction. Nobody really knows how this market will ultimately react.
It is unlikely that the Fed can tame this inflation, the highest in more than 40 years, without inducing a recession or close to it. We are likely to have enduring inflation and/or recession. That’s not good for most stocks.
Fortunately, there are a select few high-yield energy stocks that can endure and perhaps thrive in such an environment. Here are two.
ONEOK, Inc. (OKE)
- Dividend Yield 6.7%
ONEOK is a large U.S. midstream energy company specializing in natural gas. It owns one of the nation’s premier natural gas liquids (NGLs) systems connecting NGL supply in the Rocky Mountains, midcontinent, and Permian regions in key market centers, and has an extensive network of natural gas gathering, processing, storage and transportation assets. A whopping 10% of U.S. natural gas production uses ONEOK’s infrastructure.
Here are some things to like about the company and stock:
- Investment grade rated debt
- 85% of earnings fee-based
- 26 years of stable and growing dividends
- C corporation structure (generate a 1099 and not a K-1)
Earnings are resilient because ONEOK operates in the best segments and is well positioned in the high-growth shale regions. Natural gas is a rapidly growing fuel source that is much cleaner burning than oil or coal. NGL is by far the fastest-growing fossil fuel source. Midstream energy is a solid income-generating industry right now. But ONEOK is solid all the time.
The stock should be a keeper during times of inflation. Although revenues are overwhelmingly fee-based and are about merely collecting tolls for the transportation and storage of natural gas assets, the stock tends to move along with the energy sector, which is price dependent. In addition, ONEOK operates mostly under long-term contracts which have automatic inflation adjustments built in. The company also has recession resilience.
The desirability and resilience of natural gas was beautifully illustrated by the performance of the asset during the pandemic. ONEOK’s natural gas and NGL volumes continued to grow in 2020 despite it being one of the worst years ever for the energy industry. The company posted earnings growth (as reflected in adjusted EBITDA) for 2020 and throughout the lockdowns in 2021. In addition, demand for natural gas liquids (which accounts for 60% of earnings) is expected to increase more than 20% per year until 2040.
The stock is cheap. It has underperformed the red-hot energy sector this year after outperforming last year. OKE has returned about 5% YTD (as of this writing) after returning 67% in 2021. But it still sells at about 17 times forward earnings and is below the pre-pandemic high. Looking ahead, business should continue to grow. ONEOK has guided for 8.6% earnings growth in 2022.
There are some great things about the dividend, aside from the stellar 6.7% yield. For one, it is a regular dividend and doesn’t generate a K-1 at tax time, like most midstream energy companies that are Master Limited Partnerships. It also qualifies for the maximum 15% tax. OKE has also grown the dividend payout by an average of 13% per year for the past 21 years.
NextEra Energy, Inc. (NEE)
- Dividend Yield: 2.3%
Utility stocks are well-suited for recession. The sector is the most defensive on the market as earnings are virtually immune to economic cycles. Stocks also pay high dividends and typically hold up very well in down markets.
NextEra Energy provides all those advantages plus exposure to the fast-growing and highly sought-after alternative energy market. It is the world’s largest utility, a monster with about $16 billion in annual revenue and a $138 billion market capitalization.
For the last 10-, five-, and three-year periods NEE has not only vastly outperformed the Utility Index, it has also blown away the returns of the overall market over those periods. How can that be? It’s because it isn’t a regular utility.
NEE is two companies in one. It owns Florida Power and Light Company, which is one of the very best regulated utilities in the country, accounting for about 55% of revenues. It also owns NextEra Energy Resources, the world’s largest generator of renewable energy from wind and solar and a world leader in battery storage. It accounts for about 45% or earnings and provides a higher level of growth.
Investors love it because they get the safety and income of a utility and still get great growth and capital appreciation. It’s the best of both worlds.
From 2004 through 2019 the company grew earnings by an average annual rate of 8.4% and grew the dividend at an average rate of 9.4% per year. That propelled the market returns stated above. The company is targeting 10% annual dividend growth through at least 2022. NextEra has a long track record of meeting or exceeding goals.
A key aspect of this recommendation is timing. The chart on this stock had been a thing of beauty until recently. But the uptrend got interrupted and the stock has been floundering somewhat this year as the stock is 20% below the high.
With NEE you get a solid defense utility that can weather a recession with solid returns. You also get a growth aspect from clean energy and the desirability as a conservative play on the trend.
Other Dividend Lists
The following lists contain many more high-quality dividend stocks:
- The Dividend Aristocrats List is comprised of 65 stocks in the S&P 500 Index with 25+ years of consecutive dividend increases.
- The High Yield Dividend Aristocrats List is comprised of the 20 Dividend Aristocrats with the highest current yields.
- The Dividend Achievers List is comprised of ~350 stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 38 stocks with 50+ years of consecutive dividend increases.
- The High Yield Dividend Kings List is comprised of the 20 Dividend Kings with the highest current yields.
- The Blue Chip Stocks List: stocks that qualify as Dividend Achievers, Dividend Aristocrats, and/or Dividend Kings
- The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
- The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.