The substantial improvement in oil prices pushed the S&P 500 energy index 30% higher since the beginning of 2021. Despite that, some stocks from the energy sector still offer a buying opportunity amid the prospects for significant improvement in profits and shareholder returns.
Before digging deeper into the buying opportunities in best energy dividend stocks, it’s wise to briefly look at oil price fundamentals because energy stocks’ performance is directly correlated to oil prices.
Oil prices recovered to $60 a barrel at present after dipping to the negative territory last year. Still, the market pundits see more upside. For instance, Goldman Sachs forecasts oil price to hit $70 level during the second quarter and extend the upside momentum to $75 a barrel in the third quarter.
“We further believe that this additional rally will be supported by the current repositioning for a reflationary environment with investors turning to oil, buying a lagging real asset that benefits from a stimulus-driven recovery and has demonstrated an unmatched ability to hedge against inflation shocks,” said Goldman Sachs.
Low breakeven point make ConocoPhillips an attractive energy pick
The largest US-based exploration and production company ConocoPhillips (NYSE: COP), is among the best dividend stocks, and it is the biggest beneficiary of improving oil prices because of its lower breakeven point.
The company’s potential to breakeven around $45 a barrel compared to strong oil projections means a strong balance sheet plus robust free cash flow generation and hefty dividends for investors.
Moreover, the expectations for higher profits and dividends in 2021 would help the oil exploration and production company to sustain the share price upside momentum.
“COP’s diversified portfolio construction, asset quality, and business plan have long supported a high degree of strategic flexibility. The company’s decision to restart the buyback in the fourth quarter, even in the current environment, highlights the benefit of such flexibility, with sufficient balance sheet strength and organic breakeven (2021 estimated post-dividend breakeven of $44/bbl WTI), to take advantage of counter-cyclical, accretive share repurchases,” Simmons Energy said in a research note.
Chevron and Exxon are among the best energy dividends stocks
The most prominent and largest oil giants Chevron Corporation (NYSE: CVX) and Exxon Corporation (NYSE: XOM), have also sustained their dividends in 2020 despite a massive oil price collapse.
Nevertheless, these two companies are likely to make big dividend increases in 2021 on the back of significant growth in oil prices. Chevron’s dividend yield currently stands around 5%, while Exxon’s dividend yield is well above 6%.