Where Energy Dividend Stocks Are Headed Next

For 2021, the energy sector was the top-performing of the eleven S&P-designated sectors, and the Energy Select Sector SPDR ETF (XLE) posted a 52% return for the year.

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Energy midstream – the pipeline, terminals, and storage subsector – was up a similar 45%.

For 2021, the energy sector rode the wave of crude oil, climbing from $45 per barrel to $75. Supply and demand forces point to continued gains for crude in 2022.

Midstream companies generally do not have exposure to energy commodity prices and instead typically earn fee-based revenues. These businesses generate stable cash flow and usually pay attractive dividends.

Investors buy into midstream stocks primarily as income investments. Currently, the Alerian Midstream Energy Index yields 6.3%.

While the broader energy sector should continue to outperform in 2022, the midstream companies need to become more investor-focused to put up another good total return year this year…

Long-term total returns from energy midstream are driven by a combination of an attractive yield plus dividend growth. At the pandemic’s start, midstream companies either froze their dividend rates or reduced them. The dividend growth that historically fueled midstream returns stopped.

Two years later, it is time for these companies to return to meaningful dividend growth. By meaningful, I look for at least 5% annual increases, with a preference for high-single-digit to low-double-digit increases.

I worry that boards of directors at midstream companies have become comfortable hoarding free cash flow to increase coverage ratios or fund share buybacks. As I explained just before Christmas, share buybacks without dividend growth are equivalent to throwing away money.

If companies plan to resume dividend growth, they should start with the next round of dividend announcements, due out in January and February. Here are two midstream stocks that I will watch closely.

Small-cap midstream company EnLink Midstream LLC (ENLC) recently announced its plans to increase its dividend by 20% in 2022. The company slashed the dividend at the pandemic’s start, so this is good news.

However, the press release was not an official dividend announcement, so the company needs to follow through in January with an official dividend declaration at the higher rate. The proposed dividend rate gives EnLink a 6.4% yield.

Historically, large-cap midstream company ONEOK, Inc. (OKE) has increased its dividend every quarter by 2% to 3% per quarter; however, the last dividend boost came in January 2020. ONEOK is a midstream leader, and returning to dividend growth would be a strong sign for the rest of the sector.

I’m crossing my fingers that the company will increase its payout this month. ONEOK currently yields 6.1%.

Disclaimer: The information contained in this article is neither an offer nor a recommendation to buy or sell any security, options on equities, or cryptocurrency. Investors Alley Corp. and its ...

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