Investing in oil stocks can seem like a dangerous proposition these days. Over the past two years, oil prices collapsed from above $100 per barrel in 2014 all the way to $27 per barrel at the 2016 low.
Due to crumbling commodity prices, a number of oil and gas stocks were forced to cut or suspend their shareholder dividends to stay afloat. With that in mind, one could hardly blame investors for not wanting to touch oil stocks.
But there are still profitable oil stocks that have maintained their dividends, even during the downturn. Three dividend oil stocks with reliable payouts are ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), and Phillips 66 (NYSE: PSX).
Operating Advantages Fuel Payouts
Exxon Mobil, Chevron, and Phillips 66 are serious dividend payers. Based on their recent closing prices, Exxon Mobil yields 3.3%, while Chevron and Phillips 66 yield 4.2% and 3.1%, respectively.
The reason why these three dividend oil stocks have maintained their impressive dividends even under pressure from extremely low oil prices is because they all share a distinct operating advantage. For Exxon Mobil and Chevron, the advantage they share is they are integrated, meaning they have large refining businesses in addition to their production businesses.
Phillips 66 is a pure-play oil refiner.
Refining is a huge boost for all three, because refining actually does better when oil prices are volatile. Declining oil prices expand refining profit margins by reducing feedstock costs.
Exxon Mobil’s earnings fell by half last year, but it still earned $16.2 billion in profit. Profits in its refining business more than doubled in 2015.
Similarly, Chevron earned $4.6 billion in net profit last year, thanks entirely to its refining business. Its downstream unit earned $7.6 billion of profit for 2015, up 75% from the year before. The huge increase in refining profitability helped offset a $1.9 billion loss in Chevron’s upstream business.
Phillips 66’s adjusted earnings grew 10% last year. Not surprising, the refining unit did the heavy lifting. Refining profits, as adjusted for one-time items, increased 60% in 2015. This is a major benefit for the company since refining makes up more than half of its total annual profit.
Another major factor for Exxon Mobil and Chevron is that they are aggressively cutting costs to help preserve profitability. Exxon Mobil reduced its stock buybacks by $9 billion last year, and it cut capital expenditures by 19% in 2015.
Similarly, Chevron cut capital spending by $7 billion last year. It also sold $6 billion of assets last year, with more asset sales planned for 2016 and 2017. This has helped it to maintain its dividend, which cost the company $8 billion last year.
Payouts Raised by Oil Dividend Stocks
Even though commodity prices are still nowhere near their 2014 high, these three should continue to pay their dividends, thanks to their structural advantages. Exxon Mobil and Phillips 66 even managed to raise their dividends this year.
In April, Exxon Mobil increased its dividend by 2%, which was its 34th straight year of dividend increases. The company has paid consecutive dividends for more than 100 years.
Phillips 66 passed along an even more impressive dividend increase. In May, it raised its dividend by 12%. The company has now hiked its dividend six times since its 2012 initial public offering, at a 33% compound annual rate in that time.
Barring another massive downturn in oil and gas prices, Exxon Mobil and Chevron should be able to continue paying their hefty dividends. Phillips 66 is in even better position—with no upstream business, it doesn’t have to worry about low oil prices. These three dividend oil stocks are good options for income investors looking for high dividends in a very challenging time for the industry.
How Rockefeller Really Got Rich
Upon his death, John D. Rockefeller held a fortune worth $336 billion in today’s dollars. But the conventional account of how he actually made his billions is way off base.
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