In this environment with low interest rates, it is difficult to find ways where you can achieve higher returns. The best CD rates in October were around 2.25% for a one-year period, while the Treasury offered 1.57%.
With those low rates, it makes sense that income-seeking investors look elsewhere for higher returns and the energy sector is a point of attention. When it comes to dividend yields, oil stocks generally beat the market. To explain why they offer generous returns – in some cases even 7% – investors need to understand that they are being paid for the exposure they take on very volatile.
The recent example of this boom-and-bust cycle on the energy markets was the deep fall in oil prices that began in 2014, following a remarkable series of the previous decade in which prices traded even more than $ 100 per barrel
But the decline in 2014 was so sharp and painful that it led to various oil producers reducing or eliminating their dividends as prices dropped. Taking into account these risks, investors can still get some bargains from the energy sector. Here are two candidates who should be eligible for the return-seeking investors:
1. Royal Dutch Shell
Among the oil super majors, it is difficult to ignore Royal Dutch Shell (NYSE 🙂 when it comes to earning a hefty dividend. The company pays $ 0.94 a quarterly dividend, which translates into a dividend yield of 6.65% on yesterday's price.
The shares closed around 1% at $ 57.26 yesterday. They have fallen by around 2% so far this year, following a 45% jump since the low of 2016. In the company's latest strategy update in June, the Anglo-Dutch oil major predicts a much stronger cash generation in the coming years. This could mean that the producer is in a better position to raise his dividend, which he has kept flat for the past four years.
Shell says it has the potential to issue $ 125 billion in dividends and buy back shares between 2021 and 2025. The company paid $ 16 billion in dividends on top of the current buy-back program that is slightly less than Costs $ 10 billion.
However, that prediction can be optimistic if the current fall in oil prices continues. Shell shares lagged behind the oil decline in 2014 when the company's debt increased following the massive acquisition of BG Group. Since then, Shell has worked aggressively to reduce its debt and has made returning cash to investors the priority.
In our opinion, Shell is much better prepared this time to cope with a prolonged fall in oil prices thanks to the company's aggressive debt reduction strategy, supported by its plans to secure assets worth $ 30 billion. to sell.
2. BP
London-based BP (LON: ) PLC (NYSE 🙂 is another strong name when it comes to paying dividends. The current return is 6.62%, which translates into a quarterly payout of $ 0.615 per share. That payout has risen by only 5% since 2014, showing that the oil giant has since been dealing with cash. The shares have fallen by 2% since the beginning of the year and closed yesterday at $ 37.16.
One of the main reasons why BP has too little money is the Deepwater Horizon 2010 oil spill in the Gulf of Mexico. The company is still paying for that disaster and will continue to do so for a few years.
During the second quarter of the profit season, BP increased its cash flow as higher production offset the effect of lower energy prices.
Cash flow from operating activities excluding payments related to the oil spill in the Gulf of Mexico increased by 17% compared to a year earlier to $ 8.2 billion. In addition to the payment for buying the US fields, BP also paid around $ 1.4 billion in fines for the 2010 catastrophe. BP will sell $ 4 billion to $ 5 billion in assets this year as part of a plan to complete $ 10 billion in divestments by 2020 and use the proceeds to lower the debt ratio.
Bottom Line
Both companies offer a different appeal for long-term investors. If you are an oil bull, Shell's juicy dividend yield is worth considering, especially as the company's efforts to restore its balance sheet produce results. As oil prices improve from here, Shell has an attractive asset mix to produce robust cash flows with the potential to grow dividends.
BP, on the other hand, pursues many growth projects that position it to generate substantial free cash flow by 2021. In addition, the company has a new CEO Bernard Looney who could bring new ideas to reward investors as soon as it asset of the company the restructuring is over and the fines for oil leakage have been paid.
