The 3 Best High Income Energy Stocks in a Decade

oil factory american flag

While we focus on market gyrations and trade talks, this country is undergoing a massive energy boom. It is a global economic phenomenon of staggering proportions. I will highlight three high income energy stocks that are perfectly positioned to benefit.

As recently as 2007, this country’s energy situation was dire. Domestic oil production hit a modern-day low. We were importing nearly two-thirds of our oil needs and sending hundreds of billions of dollars overseas every year. Legendary oil man T. Boone Pickens said at the time that if such energy dependence continued we would affect the greatest transfer of wealth in human history.

Then new technologies in horizontal drilling and hydraulic fracturing (fracking) saved the day. These technologies made it possible to get to previously irretrievable oil and gas trapped in the massive quantities of shale rock formations across the country. Now, the U.S. is the world’s largest producer of both oil and natural gas. Take that, OPEC!

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And U.S. oil and gas production is expected to surge even further in the years ahead. The U.S. Energy Information Administration expects oil production to go from a little over 11 million barrels per day (Mbpd) in 2018 to 13.2 Mbpd in 2020. The agency also expects natural gas production to increase by 8% this year alone.

That said, all that extra supply will likely hold prices down. Companies levered to the price of oil and gas may not do that well. However, there are certain companies that are not exposed to commodity prices, but instead collect a fee for the transport and storage of oil and gas. They should benefit greatly from all the oil and gas sloshing around the country.

At the same time these midstream or energy infrastructure companies are dirt cheap, with high yields. You would think companies poised to take advantage of such explosive growth should be soaring. But they’ve had a rough time of it for several years, for a few reasons.

First, the oil price crash between 2014 and 2016 crushed the whole sector. Then there was a change in the tax laws, which made MLPs (Master Limited Partnerships) less advantageous, and rising interest rates held them down.

But the situation could be changing. The industry carnage is over and interest rates are less likely to rise. Meanwhile, these perfectly positioned stocks are dirt cheap and high yielding in a sobered up and recovering market. These three high income energy stocks could be some of the best investments of the decade.

3 High Income Energy Stocks to Buy

High Income Energy Stock #1: Cheniere Energy Partners (CQP)

Yield 5.6%

Cheniere Energy Partners is a Master Limited Partnership (MLP) that operates the first natural gas export facility in the U.S., Sabine Pass. This is a huge story because this country has more natural gas than it can use and exporters can sell dirt cheap gas overseas at much higher prices. In fact, energy experts estimate that natural gas exports, in the form of natural gas liquids (LNG), will account for most U.S. demand for the fuel in the years ahead.

Cheniere has its facility almost completely operational and the last of six trains should be fully running by next year. Earnings have exploded as export volumes continue to soar every year. The earnings growth rate is expected to be 45% per year for the next five years. And the dividend payout, which increased 27.7% last year, should continue to rise.

Demand is huge, and Cheniere has long-term delivery contracts that should make it stable as well. And the stock price has doubled over the past three years, including a 29% return in a down market in 2018. In the meantime, it currently sells at a valuation cheaper than the overall market, just a little over 14 times forward earnings, and pays a 5.6% yield.

High Income Energy Stock #2: Enterprise Products Partners (EPD)

Yield 6.2%

Enterprise is one the largest midstream energy MLPs in the country with a vast portfolio of service assets connected to the heart of American energy production. The partnership isn’t exposed to volatile commodity prices but rather collects a fee for the transport and storage of oil, gas and refined product. Over 90% of earnings are fee based. It’s at the epicenter of the American energy renaissance.

High quality is something every income investor should seek. And EPD is the bluest of blue-chip companies in the asset class. It has raised the distribution every year for the past 20 years, and for 58 straight quarters. During those 20 years, EPD has returned over 1,700%, compared to 240% for the S&P 500. Meanwhile, it has just a 60% payout ratio of free cash flow, which enables it to fund projects without incurring too much debt, and has one of the highest credit ratings in the business. It pays no incentive distribution rights to a general partner and can pay all of its distributable cash flow to investors.

Enterprise has $2.1 billion in recently completed growth projects coming on line this year and another $6 billion for the next couple of years. It should grow cash flow by 4% to 9% over the next couple of years, which combined with the 6.2% yield should provide double-digit annual returns.

Meanwhile, this energy infrastructure superstar sells at valuations far below historical averages, and more than 30% below the 2014 high, at a time when U.S. energy production is at all-time highs and the envy of the world. Of the 27 analysts who cover this high income stock, 26 rate it a “buy’ or a “strong buy”.

Enterprise Products Partners (EPD) is one of the best high income energy stocks of the decade.High Income Energy Stock #3: Magellan Midstream Partners (MMP)

Yield 6.6%

Magellan is one of the best pipeline MLPs in the country. It has a massive network of refined product and crude oil pipeline that is connected to more than 50% of U.S. refining capacity. But recent returns for Magellan have been subpar.

Over the past 10 years, the MLP has generated an average annual return of 19.6%. But over the past five years, the average annual return has been a mere 3%, and the stock price is where it was back in October 2013. Yet Magellan has grown earnings by an average of 10.3% per year during those give years.

Magellan sold off some less productive assets last year and will continue somewhat this year. But opportunities for new projects are massive as the energy sector booms. In 2020, Magellan has three huge projects coming online that should boost the bottom line and the market will likely begin to price that in around the middle of the year. In the meantime, you get more than a 6% yield on a cheap stock that is a behemoth in a rapidly growing industry. It should be worth the wait and the current price is a good entry point.

Those are my three favorite high income energy stocks today. Now, if you want to know what other dividend stocks I like – energy or otherwise – you can subscribe to my Cabot Dividend Investor advisory by clicking here.

Tom Hutchinson

High Income and Peace of Mind

Tom Hutchinson, Chief Analyst of Cabot Dividend Investor, is a Wall Street veteran with extensive experience in multiple areas within the financial world. His advisory is geared to providing you both high income and peace of mind. If you’re retired or thinking about retirement, this advisory is designed for you.

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