With interest rates still hovering near 2%, investors everywhere continue to search for yield.
This unflinching affinity for high-yielding investments has even pushed valuations among utilities — a sector that typically trades at a discount to the broader market — to record heights. Similarly, the flood of money into mortgage REITs has driven that sector’s valuation sky-high, as its market capitalization has nearly tripled over the past three years.
With valuations in many high-yielding sectors now looking stretched, income-starved investors may want to more carefully scour the energy sector, which is currently trading at a substantial discount to the broader market.
Midstream companies
The first and most obvious place to look for yield within the energy sector is midstream companies, many of which are structured as master limited partnerships, or MLPs. While these tax-advantaged entities have also seen a massive influx of money over the past few years, their basic value proposition remains intact: They’re absolutely necessary in sustaining the massive domestic shale boom and are investing record amounts of capital in new infrastructure projects that should continue to drive distribution increases for years to come.
One company that exemplifies these qualities is Enterprise Products Partners L.P. (NYSE:EPD), the largest publicly traded energy partnership in the country. Though its 4.3% yield is below the average MLP’s yield, its payouts are about as sustainable as they come. In the first quarter, the company reported a distribution coverage ratio — a commonly used measure that gauges the sustainability of a partnership’s distributions — of 1.5, meaning it has cash flow well in excess of what its paying out to investors.
With the vast majority of its income secured by long-term, fee-based contracts, Enterprise Products Partners L.P. (NYSE:EPD)’s cash flows are both stable and predictable. Not surprisingly, the partnership has raised its distribution a whopping 35 quarters in a row, and with roughly $7.5 billion worth of capital projects currently under construction, the trend is likely to continue.
Integrated oil companies
Outside the energy MLP space, some of the integrated major oil companies also present solid dividend opportunities, currently offering an average yield of around 3%.
ConocoPhillips (NYSE:COP) is a standout, currently boasting a 4.2% yield. Not only has the company raised its dividend payments for 12 years in a row, but it has also raised them by an average 14.2% annually over the past decade, while managing to keep its payout ratio under 50% over the vast majority of the period. As the company continues to divest non-core assets, maintaining dividend growth will remain one of its top priorities, which should be encouraging to yield-seekers.
Another company to consider is Occidental Petroleum Corporation (NYSE:OXY), which offers a decent 2.9% dividend yield. Over the past decade, the company has demonstrated a solid commitment to consistent dividend growth, having raised its dividend each year for 11 years in a row.
In February, it raised its dividend by 18.5% to an annualized $2.56 per share, bringing its 11-year compounded dividend growth rate to an impressive 16% per year. In addition, the company boasts a very low cost of production relative to its peers, as well as the strongest production growth among the integrated majors.
The article Searching for Yield? Look to the Energy Sector originally appeared on Fool.com is written by Arjun Sreekumar.
Fool contributor Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool recommends Enterprise Products Partners.
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