Paying Dividends: Energy Companies Dominate Top-Yielding Stocks

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Energy companies dominate the top-yielding stocks in the S&P 500 index as more oil and gas producers adopt variable dividends keyed to profits at a time of high energy prices.

The variable dividends—which come on top of the company’s base dividend—are an acknowledgment that energy companies are earning outsize profits from high energy prices. If oil prices drop, the variable dividends likely will be reduced or even eliminated. But for now, hefty variable dividends are creating extraordinary payouts for some energy companies.

As of Friday’s close,

Pioneer Natural Resources

(ticker: PXD),

Diamondback Energy

(FANG), and

Devon Energy

(DVN) had yields of 9% or more. Pioneer led the index with a 14.1% yield, the highest by a wide margin.

Coterra Energy

(CTRA), a big natural gas producer, yielded 8.6%.

Rounding out the rest of the top 10 yielders in the

S&P 500

were

Lumen Technologies

(LUMN),

Altria Group

(MO),

Vornado Realty Trust

(VNO),

Simon Property Group

(SPG),

AT&T

(T), and

Kinder Morgan

(KMI).

Within the energy industry Pioneer and Devon were leaders in moving to pay out more of their free cash flow in a mix of regular and variable dividends. The approach has proven popular with investors who like the high yields and financial discipline that come with high dividend payout ratios.

Pioneer, whose shares traded around $242, recently lifted its base dividend by 40% to $4.40 a share annually which resulted in a yield of 1.8%. The total quarterly dividend is $8.57 a share including a big variable payout as Pioneer distributes up to 75% of its free cash flow in the variable dividend after adjusting for the base payout.

JP Morgan

analyst Arun Jayaram called Pioneer “an industry leader in cash returns.”

The total dividends at Pioneer and its peers with variable payouts, however, could come down with energy prices.

In a recent note on Devon,

Morgan Stanley

analyst Devin

McDermott

wrote: “The debate between variable dividends and buybacks was topical among investors, with no clear consensus on which is preferred. That said, all agreed that consistent return of cash to shareholders is a positive.”

McDermott sees Devon as capable of providing a total yield (dividends plus buybacks) of about 9% in 2023, assuming $90

West Texas Intermediate

crude oil, roughly in line with current prices.

Company / Ticker	Recent Price	Dividend Yield	2022E P/E
Pioneer Natural Resources / PXD	$242.00	14.1%	7.3
Diamondback Energy / FANG	130.39	9.4	5.0
Devon Energy / DVN	68.51	9.1	7.4
Lumen Technologies / LUMN	11.06	9.0	6.9
Coterra Energy / CTRA	30.30	8.6	6.1
Altria Group / MO	45.47	7.9	9.4
Vornado Realty Trust / VNO	28.90	7.3	9.4*
Simon Property Group / SPG	111.01	6.3	9.5*
AT&T / T	18.43	6.0	7.3
Kinder Morgan / KMI	18.72	5.9	15.7

Notes: As of Friday’s market close; *Price to FFO, or funds from operations, a common measure of value for REITs; E=estimate.

Source: Bloomberg.

Lumen, a telecom provider whose shares traded around $11, offered a 9% yield. The dividend of $1 a share annually looks amply covered by the company’s projected free cash flow of about $2 share this year.

Altria, the maker of Marlboro cigarettes, traded around $45 and yielded 8%. The company’s shares are down from an April high of $57 amid investor concerns about tougher federal regulations including potential sharp nicotine reductions in cigarettes.

Historically, it has paid to buy Altria when regulatory fears surface because the worst-case scenarios haven’t panned out.

One key risk is continued declines in U.S. cigarette consumption, and Altria has raised prices to offset that. Altria has long taken its dividend seriously and targets an 80% payout ratio of earnings. Altria often lifts its quarterly dividend in the summer and analysts expect a roughly 5% increase to about 94 cents later this month, according to Bloomberg.

Simon Property Group is the largest owner of shopping malls in the country. The well-managed company continues to lift its quarterly dividend, raising it to $1.75 a share earlier in August, up 16.7% year over year.

The stock at around $110 yielded 6.3% and was down 36% from its November high amid worries about weakening consumer spending and a possible recession. High-end malls operated by Simon, however, have proven durable and the company’s funds from operations were little changed year-over-year in the second quarter at nearly $3 a share.

Vornado Realty Trust, a big owner of Manhattan office buildings, is one of the worst performers among major REITs since the pandemic amid fears about the health of the New York market given the work-from-home trend. New York has been one of the weaker office markets in the past two years.

The company, whose shares traded around $29, less than half prepandemic levels, could become an activist target given an attractive Manhattan portfolio centered around Penn Station and its development projects. Its shares yielded over 6%.

AT&T cut its dividend earlier this year in conjunction with its spinoff of

Warner Bros. Discovery

(WBD) stock to shareholders. The yield was 6% with the stock at around $18.

On the company’s recent earnings conference call, CEO John Stankey said “Our intent is to ensure that we’re returning a good and competitive dividend out to our shareholders, which we have today.” His comments, however, were short of a full commitment to maintaining it over the long term. He noted that the company’s priority is improving its balance sheet and reducing financial leverage.

Kinder Morgan, one of the leading transporters of natural gas in the country, lifted its dividend by 3% earlier this year. Its shares, which traded around $19, yielded about 6%. It comfortably covers its dividend from free cash flow.

Write to Andrew Bary at [email protected]