Double Digit Dividend Yields And The Potential For 100% Stock Price Gains

For the broader U.S. stock market, the pandemic-triggered crash has come and gone. In February and March, the S&P 500 stock index experienced a short-term bear market, dropping by over 35% from its early-February peak to the late-March bottom.

The S&P 500 steadily recovered the losses and then some, with the index now up 11% year-to-date; however, the recovery has not been even across business sectors. The S&P Energy sector remains mired in a bear market, still down 42% year-to-date. Is it time to look for value in this very shunned sector of the stock market?

Energy subdivides into three sectors:

  1. Upstream are the oil and gas producers. These are the drillers of wells.
  2. Downstream energy companies refine fuels and market their finished product.
  3. Midstream energy companies provide the connection between upstream and downstream and are the ones we’ll look at in this article. Midstream companies own and operate pipelines, storage terminals, export terminals, and natural gas processing facilities.

Unlike the other two energy sectors, midstream business operations generate stable, mostly long-term contract, fee-based revenues. Unfortunately, the investing public lumps all energy stocks together, and midstream share values are as volatile as the rest of the sector.

Over the last several years (since 2016), companies in the midstream sector have restructured their business models and financials to generate stable earnings and rely less on the debt and equity markets to fund growth. The restructuring has been successful. Alerian stated in a recent article: “…the large-cap names that did not cut their distributions earlier this year continued to provide solid coverage, demonstrating the benefits of a focus on sustainable distribution growth and capital discipline that the space has been moving towards for years.”

For the 2020 second quarter (when energy prices crashed), Alerian reported the constituent companies in the Alerian MLP Infrastructure Index (AMZ) generated average cash flow coverage of 1.8 times the distributions paid. In 2016 and 2017, average coverage was much lower at 1.2 times. The dividend coverage is much stronger here in 2020 than it was a few years ago. That is despite the pandemic hit to the energy sector.

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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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