Despite Falling Oil Prices, 3 High-Yield Dividend Stocks to Buy Now

Oil prices are falling, making now a good time to reassess how best to approach investing in the sector.

In its August short-term energy outlook, the US Energy Information Administration (EIA) cut its full-year price target for Brent crude (the international benchmark) from $86 to $84 a barrel. The EIA remains optimistic that crude oil prices will rise in the coming months, but also expects a decline in oil consumption.

Demand for oil tends to increase when global economic output increases. But the relationship between the business cycle and the price of oil can vary from one region to another, depending on the level of economic development and climate policy.

Despite some headwinds for oil prices, here’s what these Fool.com contributors think Enbridge (ENB -0.03%), Equinor (EQNR -0.22%)and Vitesse Energy (VTS -0.41%) there are three energy dividend stocks to buy now.

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Enbridge: A midstream leader with nearly three decades of dividend growth

Scott Levine (Enbridge): Oil prices may be falling, but that’s no reason to avoid top energy stocks like Enbridge — a company that transports about 30 percent of the crude oil produced in North America and nearly 20 percent of the natural gas used in the U.S.

In fact, the stock is attractively valued right now, giving income investors a great opportunity to load up on a leading stock that has demonstrated a strong commitment to rewarding shareholders, growing its dividend for 29 consecutive years and have a head start. dividend yield of 6.9%.

While shares of upstream and downstream companies are sensitive to energy prices, Enbridge is showing more resilience. The company operates oil and natural gas pipelines and storage facilities that generate strong and reliable cash flows. Enbridge signs long-term contracts with customers, helping protect it from energy price volatility. In addition, Enbridge has cost-of-service regulatory arrangements to help mitigate risk.

This business model gives management a solid forecast of future cash flows — which, in turn, helps it plan dividend increases and other capital expenditures like acquisitions. Management, for example, projects distributable cash flow — $11.3 billion starting in 2023 — to grow at a 3% compound annual rate through 2026.

Trading at 9 times operating cash flow, Enbridge shares are priced to a five-year operating cash flow multiple of 9.2. It may not be a flashy buy, but not every stock purchase has to be. Enbridge is a compelling choice for oil diggers for a reliable, low-risk dividend stock.

Equinor: An energy major worth buying now

Daniel Foelber (Equinor): Investors have penciled in August 28 as a date worth noting because it’s the time for the market to love Nvidia is set to release its fiscal second-quarter 2025 results. But it’s also when Norwegian energy giant Equinor will distribute $0.70 per share in dividends to holders of American depositary receipts (ADRs) on the New York Stock Exchange York, which translates to an annual return of 10.4% based on Equinor’s share price of 10.4%. around $27.

ADRs offer US investors a way to buy shares of foreign companies such as Equinor, Toyota Motoretc., at an American exchange.

Equinor’s regular quarterly dividend is $0.35 per share, but it also pays an extraordinary dividend of $0.35 per share based on its business performance. In 2022, it paid $2.90 in total dividends per share, followed by $3.40 in dividends per share in 2023.

Whenever a company has an abnormally high yield like Equinor, it’s best to approach the investment opportunity with caution to make sure the company can afford the dividend expense and understand why the yield is so high. In Equinor’s case, the company has been very clear about its large program of returning capital to shareholders, both through buybacks and dividends.

Unlike other oil companies that are ramping up capital spending and/or making major acquisitions, Equinor is keeping a tight lid on spending as it works to diversify its businesses and invest in renewable energy. The company’s oil and gas assets are a cash cow, and Equinor is passing profits directly to shareholders — including plans for $14 billion in buybacks and dividends in 2024 — which represent 18.6 percent of Equinor’s market value.

Equinor is an excellent choice for investors who agree with its plans to reduce domestic oil and natural gas production and meet its ambitious carbon reduction goals. However, if you’re looking for companies that are aggressively boosting oil and gas production, you may prefer ExxonMobil or ConocoPhillips instead.

Vitesse Energy: An energy company where the dividend comes first

Lee Samaha (Vitesse Energy): Trading at a dividend yield of 8.6% at the time of writing, Vitesse Energy is an oil and gas exploration and production company that operates an unusual business model. Instead of owning and operating assets, management prefers to buy interests in wells operated by other oil and gas companies such as The energy of chords, Hessand EOG Resources.

As of August, it held interests in 7,018 wells with “an average working interest of 2.8% per working interest well.” The strategy diversifies risk in any well and also provides flexibility to management as it is not encumbered by drilling obligations as an operator.

On the other hand, the majority of its assets are in the Bakken oil field in North Dakota, and the model requires management to continue to increase production through successful evaluation and acquisition of assets. It is also an asset-light model, so the Vitesse does not have significant ongoing maintenance capital investment requirements.

In addition, management follows a discretionary oil production hedging policy to protect the dividend. This policy can be good because it dilutes the stock’s risk from oil price exposure and strengthens Vitesse’s exposure to what it does best: growing oil and gas production.

That said, there is still a discretionary element here, and investors are counting on management to offset any significant weakness in oil prices. Perhaps the best way to think about Vitesse is as a stock likely to do well outside of a sharp drop in oil prices. This makes it attractive as part of a diversified portfolio of high yielding stocks.