It’s likely a good bet that the Federal Reserve will raise the federal funds rate by 25 basis points (1/4 of 1%) in September. Fed Chair Kevin Warsh sparked a rift among the Federal Reserve Governors when rates were held steady last month. Three of the governors dissented and wanted to raise rates then. If the Consumer Price Index and the Producer Price Index for July come in hot next week, that will almost guarantee a rate hike. While the bond market will not be thrilled, owners of high-yielding energy stocks may fare better, as they yield more than government bonds and have upside potential, especially as power demand rises amid the acceleration of data center computing.
In fact, RBC Capital says that:
Natural gas demand from U.S. data centers is projected to rise significantly, increasing consumption by 3 to 6.1 billion cubic feet per day (Bcf/d) by 2030, representing up to a 20% increase in annual average power-sector burn. Developers have announced roughly 101 gigawatts of on-site (behind-the-meter) natural gas power capacity to bypass congested grid interconnections. Natural Gas Intelligence says that national power-sector usage could rise by up to 15%, with summer power-sector demand tracking toward 45 Bcf/d by 2027. By 2028, this is projected to equal 12% of total U.S. electricity demand (potentially reaching 580 TWh), with heavy reliance on gas-fired generation to supply reliable 24/7 baseload power.
The way to play this from a total-return angle is to focus on midstream companies that transport and store natural gas and oil. Four of our favorite companies, each yielding 6% to 7% or more, are attractively priced for investors seeking natural gas exposure from a growth and income perspective. All four are rated Buy at the top Wall Street firms we cover.
Why Do We Cover the High-Yielding Energy Dividend Stocks?
Since 1926, dividends have accounted for approximately 32% of the S&P 500’s total return, while capital appreciation has accounted for 68%. Therefore, sustainable dividend income and the potential for capital appreciation are essential to total return expectations. A study by Hartford Funds, in collaboration with Ned Davis Research, found that dividend stocks delivered an annualized return of 9.18% over the past 50 years (1973 to 2023). Over the same timeline, this was more than double the annualized return for non-payers (3.95%).
Energy Transfer
Energy Transfer (NYSE:ET | ET Price Prediction) is one of North America’s largest and most diversified midstream energy companies. This top master limited partnership is a safe option for investors seeking energy exposure and income, as the company pays a 6.71% distribution yield. Energy Transfer owns and operates one of the largest and most diversified portfolios of energy assets in the United States, with a strategic footprint across all major domestic production basins. The company exceeded second-quarter earnings expectations and appears poised to reach new highs.
The company is a publicly traded limited partnership with core operations that include:
- Complementary natural gas midstream, intrastate, and interstate transportation and storage assets
- Crude oil, natural gas liquids (NGL), and refined product transportation and terminalling assets
- NGL fractionation
- Various acquisition and marketing assets
Following the acquisition of Enable Partners in December 2021, Energy Transfer owns and operates over 114,000 miles of pipelines and related assets in 41 states, spanning all major U.S. producing regions and markets. This solidifies its leadership position in the midstream sector.
Through its ownership of Energy Transfer Operating, formerly known as Energy Transfer Partners, the company also owns Lake Charles LNG; the general partner interests, the incentive distribution rights, and 28.5 million standard units of Sunoco (NYSE:SUN); and the public partner interests and 39.7 million common units of USA Compression Partners (NYSE:USAC).
TD Cowen has a Buy rating on the shares, with a $24 target price.
MPLX
MPLX (NYSE:MPLX) is a diversified, large-cap master limited partnership formed by Marathon Petroleum. This company is one of the top holdings in the Alerian MLP Energy exchange-traded fund and pays a healthy 7.16% dividend. The company is primarily engaged in transporting crude oil and refined products, with terminals in the U.S. Midwest and Gulf Coast regions, and in natural gas gathering and processing in the Northeast, following its 2015 acquisition of MarkWest Energy.
The company’s assets include:
- Network of crude oil and refined product pipelines
- Inland marine business
- Light-product terminals
- Storage caverns
- Refinery tanks
- Docks
- Loading racks and associated piping
- Crude and light-product marine terminals
MPLX also owns crude oil and natural gas gathering systems, as well as pipelines, natural gas, and NGL processing and fractionation facilities in key U.S. supply basins.
Royal Bank of Canada has an Outperform rating and a $60 target price.
Plains All American Pipeline
This stock traded in a tight range before breaking out, and it offers a dependable 6.43% dividend yield. Plains All American Pipeline (NASDAQ:PAA), through its subsidiaries, engages in the pipeline transportation, terminalling, storage, and gathering of crude oil and NGL in the United States and Canada.
The company operates in two segments. The Crude Oil segment offers:
- Gathering and transporting crude oil through pipelines
- Gathering systems
- Trucks, barges, or railcars
- Terminalling, storage, and other facilities-related services and merchant activities
The Natural Gas Liquids segment provides:
- Gathering
- Fractionation
- Storage
- Transportation
- Terminalling activities
- Ethane, propane, normal butane, iso-butane, natural gasoline, and crude oil refining processes
Mizuho has an Outperform rating with a $27 target price.
Western Midstream Partners
While somewhat off the radar, this is the highest-yielding stock in the group, with a 7.86% dividend yield, and it offers an outstanding entry point. Western Midstream Partners (NYSE:WES) acquires, owns, develops, and operates midstream assets.
The company is engaged in the business of gathering, compressing, treating, processing, and transporting natural gas, as well as gathering, stabilizing, and transporting condensate, NGL, and crude oil. Additionally, the company collects and disposes of produced water.
The midstream assets are located in:
- Texas
- New Mexico
- Colorado
- Utah
- Wyoming
In addition, as a natural gas processor, the company also buys and sells natural gas, NGL, and condensate on its own behalf and as an agent for its customers under specific contracts. The company’s subsidiaries include:
- Western Midstream Operating GP
- Western Midstream Services
- Western Midstream Services Holdings
- Western Midstream Operating
Mizuho has an Outperform rating and a $51 target price.
Consider This Exchange-Traded Fund
Investors receive a K-1 from energy MLPs. Those looking to avoid it can always purchase shares in the ALPS Alerian MLP ETF (NYSE:AMLP), which pays a substantial 7.86% dividend. Those investors receive a 1099 instead of a K-1.
Contact [email protected] for any questions or corrections.
Top Gaining Stocks
Top Losing Stocks