These energy and utility passive income powerhouses are out of favor, but worth buying now.
During a soaring stock market, it can be easy to ignore the benefits of companies that pay dividends. But when equities are selling off, a dividend can provide a worthwhile incentive to hold a stock through periods of volatility. Dividends also generate income without the need to sell or reduce a position, which is a great way to supplement income or generate extra money that can be reinvested in the market.
Companies that pay dividends and trade at reasonable multiples relative to their earnings provide the income and value that's right up the alley of a risk-averse investor. Here's why Essential Utilities (WTRG -0.24%), Equinor (EQNR 0.78%), and Vitesse Energy (VTS) are three dividend stocks worth buying now.
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Quench your thirst for cheap dividends with this water stock
Scott Levine (Essential Utilities): Successful investors know the importance of striking when the iron is hot. Now seems like one of those times for Essential Utilities. It's one of the largest water utilities based on market capitalization. Essential Utilities stock, which currently offers a 3.3% forward dividend yield, is hanging on the discount rack.
Although high-yield dividend stocks are alluring, it's important to test the waters before jumping in with an investment, to confirm that the company is in good financial health and able to sustain large distributions. That is certainly the case with Essential Utilities.
The company's bread and butter is its regulated markets business -- this represented 98% and 97% of operating revenue in 2023 and 2022, respectively. This helps give management excellent insight into the company's future cash flows. As a result, management can plan for capital expenditures , such as dividends to reward shareholders and acquisitions to help sustain the company's growth.
As of the first quarter, Essential Utilities reported that it has six pending acquisitions valued at about $385 million, representing more than 215,000 customers. For context, Essential Utilities had about 1.9 million customers at the end of 2023.
Those motivated to dip their toes into this leading water utility should be pleased with its current valuation. Shares of Essential Utilities are trading at a price-to-earnings (P/E) ratio of 17.6, a notabldiscount to their five-year average of 29.8 and the S&P 500's P/E of 28.2.
An oil giant that is ramping up renewable energy investments
Daniel Foelber (Equinor): In the recent quarter, Norwegian energy giant Equinor did pretty much exactly what it told investors it would do. It continued to grow oil and gas production at a modest pace of 3% internationally, made new discoveries offshore in Norway, invested in renewable energy (mainly offshore wind and solar), and returned a boatload of money to shareholders through dividends and buybacks.
Equinor completed the first tranche of its 2024 share buyback program in April and reaffirmed intentions for total capital distribution of $14 billion in 2024 -- including buybacks and dividends. It plans to spend up to $6 billion on buybacks this year, and $10 billion to $12 billion between 2024 and 2025. It paid an ordinary dividend of $0.35 per share and an extraordinary dividend of $0.35 per share and plans to raise the cash dividend by 2% per year.
Combining dividends and buybacks, Equinor estimates it is giving investors a yield of 17% this year. Needless to say, Equinor's capital return program is substantially larger than its peers' -- making the company a great choice for income investors.
Equinor has been one of the few integrated majors to not double down on fossil fuels. Instead, it's continued investing in renewable energy projects and charting a path toward reducing oil and gas production over time. Part of the pressure comes from Norway's energy policy, with 75% of Equinor owned by the Norwegian state and Norwegian private owners.
Equinor's renewable energy generation has been growing rapidly, up 48% from the same quarter last year. But so far, renewable energy projects have not been a good use of capital relative to oil and gas. Equinor is trying to de-risk its 500 MW Empire Wind 1 project offshore New York by bringing in a new partner that will reduce its capital expenditures. It was awarded a new offtake contract and project financing and now expects to produce a nominal equity return between 12% and 16% from its U.S. East Coast offshore wind portfolio, which is decent but not great.
Overall, Equinor's renewable energy projects have yet to pay off. And to avoid taking one step forward and two steps back with its fossil fuel investments, it is deciding to buy back a ton of stock and pay a generous dividend. Equinor is a good choice for investors who believe in the energy transition and agree with its use of capital. The stock is dirt cheap, trading at a forward price-to-earnings (P/E) ratio of 8.1 -- significantly below U.S. giants ExxonMobil and Chevron, which both sport forward P/E ratios above 12.
With a forward dividend yield of around 10% -- including both its ordinary payout and its expected extraordinary dividend -- Equinor is an excellent source of passive income worth considering now.
Vitesse Energy's dividend is a priority
Lee Samaha (Vitesse Energy): With the market continuing to accord low valuations to the energy companies, it's hardly surprising that the sector is embroiled in a deal-making frenzy. As such, some oil and gas exploration and production companies with high dividends, such as Devon Energy and Diamondback Energy, are focusing more on acquisitions and share buybacks than on dividends this year.
In common with Devon and Diamondback, Vitesse is also gushing out cash and trades on an excellent free cash flow (FCF) yield. However, Vitesse's acquisition activity (investing in development assets in its core North Dakota region) is much more piecemeal and in line with its usual strategy.
Vitesse is not an owner/operator of assets. Instead, it invests in minority interests in wells operated by well-established partners. As of May, Vitesse has interests in 6,932 wells with a working interest averaging 2.7% per well.
Unlike Devon and Diamondback (which pay a fixed and variable dividend), Vitesse simply pays a fixed dividend. It's currently $0.525 a quarter or $2.10 a year, yielding 8.2% at the current price. As such, Vitesse offers an excellent option for investors who are bullish on energy prices (ultimately, the earnings and cash flow of all three are oil-price-led) and who prefer dividends upfront.
Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in any of the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron and Vitesse Energy. The Motley Fool recommends Equinor Asa. The Motley Fool has a disclosure policy.
