Investors: Continue to Search for Income!
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In my last post, “Investors: Search for Income!,” I described a flurry of strong dividend-payers across the healthcare, technology, and financial sectors. Why is dividend income important now?
According to an article in The Wall Street Journal, investors are stuffing money into assets that increase their risk profile:
Investors are desperate to get more income … So desperate, they may be taking on more investment risk than they realize. Their desperation is easy to understand. Yields of some types of bonds are at their lowest levels ever.
What is the solution? In my last article, I said that investors could look to assets like dividend stocks, MLPs, REITs, international and emerging bonds, and high-yield (junk) debt, then focused on a handful of dividend payers.
In this article, however, I further describe dividend stocks, focusing on the energy sector.
Payouts in Energy
*Data from Yahoo! Finance
Two major pricing factors are affecting the share prices of energy companies right now: natural gas and oil. In this article I will focus on profits from natural gas.
Excess supply of natural gas pressured gas prices, causing them to plummet. Note the poor price performance of the Natural Gas ETF (NYSEMKT: UNG) over the past five years. Also note that the ETF loses value because the fund invests in futures, whose price contango causes losses. Contango is when future prices are higher than current prices, and the fund loses money when it invests money into the higher futures prices.
However, gas prices are on the rebound year-to-date.
Higher gas prices are a boon for the energy companies listed above, because they are hampered by demand constraints, not by supply. In particular, Exxon (NYSE: XOM), ConocoPhillips (NYSE: COP), and BP (NYSE: BP) have strong profit potential. The three giants formed a joint venture in Alaska’s North Slope, hoping to invest $65 billion and 10 years into building an export facility. The facility would export natural gas to nations where natural gas sells for multiples of the price in the U.S. The risk? They need the approval of the U.S. Government.
Oil giant Chevron (NYSE: CVX) also benefits. Chevron explores, drills, liquefies, transports, and is involved in regasification of natural gas. Thus higher prices often mean higher profits for Chevron. One risk: natural gas is often transported in larger volumes when gas prices are lower, meaning that Chevron could potentially move less gas if prices spike. However, this would likely be offset by increased profits from selling the gas.
In all, an increase in natural gas prices would boost these firms’ profits – and perhaps their dividends – because the natural gas market is slowed by demand, not by supply constraints.
In today’s market environment, the search for yield is a tough one. Higher yield carries with it increased risk. The energy companies listed above are the leaders in their peer group, and they have strong dividend payouts.
Moreover, these companies stand to see additional profit if commodity prices continue to rise.
ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!