On Aug. 24, we had confirmation of what I’ve been saying for a while now: energy is the place to invest if you’re looking for dividends, specifically oil dividends.

As Reuters reports: “Energy companies reaping record profits from soaring oil and gas prices have helped global dividend payments to shareholders soar above pre-pandemic levels and to a record quarterly high.”

The data comes from fund manager Janus Henderson’s latest global dividend report. It found that oil and gas firms around the world accounted for more than two-fifths of the growth in dividend payments in the second quarter of 2022.

Dividend payouts from these firms are higher than in previous periods of high oil prices. In total, Janus Henderson calculated that global dividend payments rose to $544.8 billion in the second quarter. That’s up 11.3% on a headline basis year-on-year.

Overall for 2022, Janus Henderson forecasts global dividend payments will reach a record $1.56 trillion, a 5.8% year-on-year increase. This trend in dividend payouts from energy companies looks set to continue.

New Energy Environment

Russia’s invasion of Ukraine has helped drive home the point that we are in a very different energy environment than just a few years ago. The disruptions of recent months have triggered a readjustment in the energy market. In a just-released report, Deloitte projects that oil and gas producers could report their highest-ever free cash flow (FCF)—as much as $1.4 trillion—in 2022. And the industry could become debt-free by 2024.

Although oil prices in 2022 have been equivalent to those in 2013 and 2014, cash flows are currently three times higher, thanks to capital expenditure discipline after years of underinvestment, Deloitte analysts say.

For example, U.S. shale producers have had negative cash flows in nine out of the last 10 years. But now, they are expected to report record free cash flow of $600 billion.

And don’t think the energy situation in Europe will change any time soon. The CEO of Shell (SHEL), Ben van Beurden, has warned that Europe may need to ration access to energy for several years.

He believes the energy crisis confronting the region is likely to last more than one winter: “It may well be that we have a number of winters where we have to somehow find solutions through efficiency savings, through rationing and a very, very quick build-out of alternatives. That this is going to be somehow easy, or over [quickly], I think is a fantasy that we should put aside.”

This forecast from the head of Europe’s largest oil and gas company came after further cuts to Russian supplies sent European wholesale gas prices to another record high last week, soaring by a third.

Investing in Shell

While van Beurden’s perspective is somewhat biased, I totally agree that it is a fantasy—and one that Wall Street fully believes—to believe the current energy crisis will be over within a few months.

Over the longer-term, energy stocks appear to be setting up for a new cycle of outperformance relative to the overall stock market. Maybe that’s why Warren Buffett’s company, Berkshire Hathaway (BRK-A or BRK-B), recently received regulatory approval to buy up to half of Occidental Petroleum (OXY). The aforementioned Shell looks like another solid investment, including for dividend investors.

On July 28, Shell reported it had broken its profit record for a second consecutive quarter, as well as announcing a $6 billion share buyback. It came in with adjusted earnings of $11.5 billion in the second quarter, breaking the record $9.1 billion posted in the first quarter. The results also beat average analyst estimates of $11 billion and was more than double the $5.5 billion Shell recorded a year prior.

Cash flow from Shell’s operations hit $23 billion in the first half of 2022, higher than average analyst forecasts of $19.2 billion. Net debt fell to $46.4 billion from $48.5 billion three months earlier.

What about dividends? Shell left its quarterly dividend at $0.50 a share, but it said that, with the $6 billion buyback plan, total distributions to shareholders would be “significantly in excess” of 30% of cash flow from operations. The new round of buybacks follows $8.5 billion of buybacks that were completed in the first half of 2022.

Even with a flat dividend, Shell could still return close to $30 billion to its shareholders this year—more than 15% of its market capitalization. It is actually good news that Shell’s cash dividend is still a long way below its pre-pandemic levels. In 2020, Shell slashed its dividend for the first time since World War II, as coronavirus lockdowns hit demand for energy and pushed oil prices below $20 a barrel.

The dividend fell from $3.76 per ADR share in 2019 to just $1.91 in 2020 and $1.64 in 2021. However, the dividend was raised to $0.48 per share in mid-2021 and $0.50 per share in the second quarter of 2022.

I believe more raises in the cash dividend payouts are a given, which will add to the current 4.38% yield. Add in the capital gains—the stock is up 40% over the past year and 24% year-to-date—and Shell stock looks like a buy anywhere in the mid-$50s per share range.

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