The energy sector has been beaten like a red-headed stepchild for months. Investors are running for the hills.
What that means for folks who don’t mind a little dumpster diving is that there are fat dividends waiting to be found in the dustbin.
We’re already riding this trend in my monthly Wealth Megatrends. Sure, some positions got jostled around in the chaos. But that’s OK; even good stocks can get hit with the bad. But great stocks tend not to get hit as badly, because their dividends provide a cushion on the way down.
And companies with a history of raising dividends offer twice the cushion.
First, let’s look at a couple charts.
Here’s one comparing the broad energy sector ETF, the Energy Select Sector SPDR (XLE) with S&P 500 (SPY) and an oil services fund, the SPDR Oil & Gas Exploration and Production ETF (XOP).
You can see that so far this year, the S&P 500 is up 17.93%. The XLE, though is up only 0.4%. And the XOP has dropped a whopping 17.98%. Ouch!
But look at what this is doing to the dividends they pay …
The S&P 500 sports a dividend yield of 1.99%. Compare that to the XLE’s dividend yield of 3.64%. And the XOP has a dividend yield of 1.51%.
So, the XLE boasts more than TWICE the dividend yield of the S&P 500.
Would you rather buy something beaten down with a fat dividend yield … or something trading near all-time highs with a lower dividend payout?
And compare the price action between the broad energy sector and oil services. That smaller dividend is probably hurting oil services on the way down. Investors know they can get better yield elsewhere.
Now, there can be good reasons for buying any of these three funds. It depends on your investment goals. But if you want dividends, the XLE would be your choice. Especially if the recent bullish trend in oil holds true.
What’s that? Well, oil has been in a downtrend since last October. And while still trapped in that downtrend, recently, it’s been making higher lows.
What’s driving this move?
A bunch of things …
U.S. crude inventories are falling. The American Petroleum Institute reported a 3.45 million-barrel decline in stockpiles last week. That was more than double the 1.5-million-barrel drop forecast by market watchers. And inventories in Cushing, Okla. — America’s big oil storage hub — fell by the most since February of last year.
Discount is disappearing. West Texas Intermediate, the U.S. crude oil benchmark, has narrowed its discount to an important Middle Eastern oil benchmark. Just look at this chart I snagged from my Bloomberg terminal …
The discount is now the smallest since April 2018.
Why the change? It’s because new pipeline systems in the Permian Basin are ending bottlenecks and making the U.S. benchmark more responsive to global demand.
Canadian production cuts extended. Canada’s oil-rich province of Alberta is extending mandatory production cuts to producers in that region. The producers howl about this, but it’s supportive to their share prices — and it limits oil supplies coming out of Canada.
So, add this all up and it looks like oil prices could go challenge that downtrend. And if the price of oil breaks out higher? Then anyone who owns a dividend-paying oil stock will pile up gains from both dividends and stock price appreciation.
You can buy an ETF like the XLE. Or, if you want to roll up your sleeves and do some homework, you can find dividend-payers that should outperform the market.
I highly recommend looking for stocks that RAISE dividends over stocks that pay big dividends. Research shows that dividend-payers outperform in any market, bull or bear, while dividend-raisers perform even better — and with less volatility.
And in a market scared of its own shadow, that’s very attractive indeed.
In my Wealth Megatrends newsletter this Friday, I’m recommending two dividend-raisers — one that pays a chonky dividend and one whose dividend is set to fatten up in a hurry. Click here and follow the simple instructions to get your name on the list.
And even if you don’t get in by tomorrow, that’s OK — they are trading at value prices right now and you can easily add them in the next few days. But don’t wait too long — join me today.
All the best,