The energy sector offers the highest average dividend yield in the S&P 500, at 4.1%, more than double the index's 1.6% dividend yield. Many energy stocks offer even higher dividend yields, fueled partly by higher oil and gas prices.
Most analysts believe the sector can continue paying out sizable dividends through at least next year because they expect companies to generate lots of free cash flow. Three energy stocks that stand out for their abilities to pay big dividends are Coterra Energy(NYSE: CTRA), Devon Energy(NYSE: DVN), and Kinder Morgan(NYSE: KMI).
A high-octane dividend
Coterra Energy has paid out $2.49 per share in dividends over the past year. That gives it a whopping 10.3% annualized dividend yield at its recent share price.
Fueling that big-time payout is its strong cash flow and dividend payout policy. Corterra pays out half its quarterly free cash flow to shareholders via dividends. It uses the other half to repurchase shares and maintain a strong balance sheet. With its cash flow surging along with oil and gas prices last year, Coterra paid out a growing gusher of dividends.
Data source: Coterra Energy. Chart by the author.
The company should continue producing lots of free cash flow over the next few years. Analysts polled by FactSet estimate that the oil and gas company can generate $3.69 per share of free cash flow in 2023, giving it an eye-popping 15.2% free-cash-flow yield at its recent price. That makes the stock look dirt cheap compared to the S&P 500, which trades at around a 5% free cash flow yield.
Meanwhile, based on their current oil and gas price projections, they foresee Coterra producing roughly $3.30 per share of free cash flow in 2024. While those estimates suggest the company will pay a lower dividend over the next two years due to its current payout policy, they'll still pack a sizable punch.
A sizable yet variable dividend
Devon Energy has paid out $5.17 per share in dividends over the past year. That gives it an 8.3% annualized dividend yield at the recent share price.
The company's payout also got a boost from higher oil and gas prices and its payout policy. Devon Energy pays a fixed base quarterly dividend. In addition, it pays out up to 50% of its quarterly free cash flows via a variable dividend, a policy that enabled the company to pay significant dividends last year.
Data source: Devon Energy. Chart by the author.
The oil and gas producer should continue to generate strong cash flows for at least the next two years. Analysts polled by FactSet expect Devon to produce $9.39 per share of free cash flow this year, giving it a 15.1% free-cash-flow yield. Meanwhile, they see it falling to $6.26 per share in 2024, giving it a 10.1% free-cash-flow yield at the current stock price. While that forecast suggests Devon's dividend won't be quite as high as last year due to its variable payout policy, it will still make sizable dividend payments.
A steadily rising payout
Kinder Morgan currently pays a $1.11 per-share annualized dividend. That gives it a 6.1% yield at the recent price -- one of the 10 highest yields in the S&P 500.
The pipeline company generates lots of cash flow to support its dividend, which should continue. Analysts polled by FactSet expect the company to produce $1.61 per share of free cash flow this year, giving it an 8.8% free-cash-flow yield. Meanwhile, they see that rising to $1.67 per share in 2024, giving it a 9.2% forward free-cash-flow yield.
Unlike Devon and Coterra, Kinder Morgan generates more predictable cash flow backed by long-term contracts and government-regulated rate structures. Because of that, it pays a very stable dividend that it increases each year steadily. Kinder Morgan has already unveiled plans to expand its payout by another 2% for 2023 and will likely continue delivering modest dividend growth in the future.
Enticing options for those seeking to energize their dividend income
The energy sector is generating lots of cash these days, thanks to higher oil prices. That's giving the industry the money to pay out a gusher of dividends. Analysts expect Coterra, Devon, and Kinder Morgan to continue producing lots of cash over the next couple of years. That makes them compelling options for investors seeking high-octane income streams.
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Matthew DiLallo has positions in FactSet Research Systems and Kinder Morgan. The Motley Fool has positions in and recommends FactSet Research Systems and Kinder Morgan. The Motley Fool has a disclosure policy.
