In a market that is volatile and overvalued, it is difficult to identify stocks that can generate steady returns. However, you can look to buy stocks that pay investors a dividend enabling them to generate a steady stream of passive income. So, you need to consider companies that have strong financials, a history of consistent dividend increases, a sustainable payout ratio, and a diversified portfolio of cash-generating assets.
Alternatively, you can also look at stocks that Wall Street analysts are bullish on. Here, we look at two dividend stocks part of the energy sector with significant upside potential. Energy companies extract, distribute and store oil and gas that are always in demand. They have to invest heavily to create a robust infrastructure but are then poised to benefit from a mature market that ensures steady and predictable cash flows.
The average energy company on the S&P 500 has a yield of 4% which is significantly higher than the average yield of the index. Let’s see which energy stocks should be part of your portfolio today.
Kimbell Royalty Partners
Kimbell Royalty Partners (NYSE: KRP) acquires and owns mineral and royalty interests in oil and natural gas properties in the U.S. At the end of February 2021, it owned mineral and royalty interests in 13 million gross acres and royalty interests in 4.6 million gross acres. Its mineral and royalty interest is located in 28 states that include ownership in 97,000 gross producing wells.
Kimbell Royalty integrates real estate with energy investing as the company acquires land in exchange for mineral extraction rights in basins known for producing petrochemicals. Valued at a market cap of $857 million, this small-cap stock offers investors a tasty dividend yield of 6.7%. So, if you invest $10,000 in Kimbell Royalty Partners, you can derive $670 in annual dividend payments.
Kimbell Royalty increased sales from $66.92 million in 2018 to $110 million in 2019. But due to the ongoing pandemic sales fell to $92.9 million in 2020. Analysts tracking the stock expect revenue to rise by 46.3% to $136 million this year and by 9% to $148 million in 2022. This recovery in the top-line will allow the company to improve its adjusted net income from a loss of $4.84 per share in 2020 to earnings of $0.58 in 2022.
Since the second quarter of 2020, Kimbell Royalty Partners has raised dividends three times. The current quarterly payout stands at $0.24 per share, indicating an annual payout of $0.96 per share.
It recently declared a quarterly dividend of $0.31 per share which amounts to a payout ratio of 75%. This ratio is expected to remain constant in the second half of 2021.
Enbridge is a diversified energy giant
One of the largest energy infrastructure companies in North America, Enbridge (NYSE: ENB) is a Canada-based heavyweight that offers a forward yield of more than 6.5%. Enbridge operates oil and gas pipelines, renewable power assets as well as natural gas utilities. This diversified base of assets, enables Enbridge to derive stable cash flows across business cycles and support consistent dividend raises.
Enbridge has increased its dividends at an annual rate of 10% in the last 26 years. This growth record is unlikely to stop as the company expects to increase cash flows between 5% and 7% through 2023. The energy giant will continue to invest billions of dollars in expansion programs to build additional oil and gas infrastructure as well as offshore wind farms in Europe.
ENB stock has more than doubled investor returns in the last 10 years, after accounting for its juicy dividend payout.
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