2 Energy Stocks for a Fat Dividend Yield of At Least 7%

Barchart · 10/16 14:09

Energy companies are known for rewarding shareholders with consistent dividend payouts. Many energy companies in the midstream pipeline business operate with long-term contracts, which can generate predictable revenue for years - allowing companies to maintain and sustain their dividend payments, even during market fluctuations.

While the energy sector has faced pressure recently due to lower oil and gas prices, there are quality stocks to buy offering steady dividends. Moreover, some energy stocks continue to deliver a fat dividend yield of over 7%, making them attractive in a market where interest rates are expected to decline.

Western Midstream Partners (WES) and Energy Transfer (ET) are among the energy sector's top dividend stocks, offering yields of over 7%. Let’s take a closer look at their payouts.

#1. Western Midstream Partners Stock

Western Midstream Partners (WES) is a key player in the midstream energy sector, specializing in gathering, processing, and transporting natural gas (NGX24), natural gas liquids (NGLs), and crude oil (CLX24). The company’s strategic focus on generating stable cash flows through market cycles makes it a compelling option for dividend-focused investors.

One of Western Midstream's primary strengths is its fee-based contract model. These contracts protect the company from direct exposure to commodity price fluctuations. By structuring agreements with safeguards like minimum-volume commitments and cost-of-service provisions, WES ensures a steady revenue stream, even when energy prices are volatile. This reliable cash flow helps maintain payouts and ensures consistent earnings growth.

Further, Western Midstream’s asset portfolio spans geographically diverse locations, giving it access to multiple productive reservoirs. This not only supports its current operations, but also offers opportunities for future expansion as it attracts additional volumes to its systems. The company’s high-quality, well-maintained assets boost operational efficiency, ensuring cost-effective operations.

Additionally, Western Midstream’s strong cash flows, borrowing capacity, and liquidity position it well for growth. The company is able to pursue acquisitions and expansion opportunities that accelerate its growth trajectory. Moreover, by focusing on operational efficiencies and sustainable cost savings, WES continues to strengthen its earnings potential.

For dividend investors, Western Midstream offers an attractive yield. In April 2024, the company announced a significant 52% increase in its quarterly base dividend, bringing the annual payout to $3.50 per share. This translates into a forward yield of about 9%, making it a compelling high-yield stock.

While Wall Street analysts currently rate WES stock as a “Hold,” its high dividend yield and low-risk cash flows make it a solid choice for income investors.

#2. Energy Transfer Stock

Energy Transfer (ET) transports and stores natural gas, NGLs, and oil. The company’s focus on increasing its earnings from fee-based businesses provides stable and consistent cash flows over long contract periods, while reducing exposure to changes in commodity prices. This enables Energy Transfer to pay and hike its dividends regularly.

A significant part of Energy Transfer’s growth comes from maximizing the profitability of its existing assets. The company achieves this by adding new volumes under long-term producer agreements, enhancing utilization, and reducing costs through operational improvements. This disciplined approach supports its long-term revenue stability.

Further, strategic acquisitions have also played a crucial role in Energy Transfer's growth. Recently, it completed a $2.275 billion acquisition of WTG Midstream Holdings, a move that expands the company’s footprint in the Midland Basin. This acquisition added approximately 6,000 miles of gas gathering pipelines and eight gas processing plants to Energy Transfer's network. Two more processing plants are also under construction. These new assets are expected to boost the supply of NGL and natural gas volumes, driving additional revenue from gathering, processing, and downstream services.

With its fee-based revenue model, extensive pipeline network covering all major U.S. supply basins, and access to key domestic and export markets, Energy Transfer is set to deliver solid cash flow while minimizing exposure to commodity price swings. This financial resilience will help the company grow its dividend by 3-5% annually. Currently, ET stock offers an attractive dividend yield of about 7.7%, making it a compelling option for income investors.

Wall Street analysts favor Energy Transfer, with a “Strong Buy” consensus rating.

For investors looking for a high-yield stock with reliable payouts and growth potential, ET could be a solid choice in the energy sector.

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On the date of publication, Sneha Nahata did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.