Energy Dividend Stocks

Energy dividends are the least predictable of any major sector, and the reason is straightforward: the cash funding them depends on a commodity price the companies do not control. An oil producer earning well at $90 a barrel is a different business at $40, and its dividend usually reflects that.

The sector has responded to this in two ways worth understanding. Some producers now run a variable dividend policy: a small fixed base payment they are confident of sustaining at low prices, plus a supplementary payment that rises and falls with cash flow. Trailing yields for these companies can look spectacular after a strong year and evaporate after a weak one, which is exactly what the policy intends but is misleading if read as a forward expectation.

Midstream companies — pipelines, storage, processing — are the more stable half of the sector. They largely charge fees for moving and storing product rather than taking price risk on it, which makes their cash flows closer to a toll road than an oil well. Their yields are typically high and considerably steadier, though many are structured as partnerships with tax treatment that differs from ordinary shares.

Read the payout ratio here with particular care, since it is measured against earnings that may be at a cyclical high or low.