2 Extremely High Yield Energy Stocks to Buy

Extremely High Yield Energy Stocks to Buy: As the market continues to experience extreme volatility, many investors are turning away from growth stocks and toward dividend-yielding equities as safer options.

 

While a high dividend is no guarantee of long-term soundness, a decent yield can help investors ride out difficult times and bolster returns when markets rebound.

 

Historically, the energy sector has offered high yields to investors as a result of its generally large cash flows. Today, some of the best income-producing assets in this sector are midstream logistics companies. Here’s what you need to know about two of the top midstream companies you can buy for high yields in today’s market.

 

Magellan Midstream Partners (NYSE:MMP) provides storage and transportation services for a variety of petroleum products. The stock boasts a dividend yield of 7.82 percent for an annual payout of $4.15, making it one of the most attractive dividend opportunities. While Magellan is not yet a dividend aristocrat, it has raised its annual payout for 20 consecutive years.

 

In Q1, Magellan reported revenues of $674.7 million alongside net income of $165.5 million. Adjusted earnings worked out to $1.08 per share, slightly above analyst expectations of $1.05.

The appeal of Magellan from an income perspective comes largely from its business model. The company primarily collects fees for its services, allowing it to produce a robust cash flow each year.

 

This cash-heavy model supports higher dividend payout ratios than would normally be considered healthy. For the trailing 12-month period, MMP has paid out 85.44 percent of cash flow in dividends.

 

Because it is already maximizing its payout from cash flows, Magellan likely doesn’t have much room left to raise its dividends in the near term. With that said, its dividend yield is already exceptional. With future increases in revenue, MMP shareholders could also see additional long-term growth in payouts.

Despite its strength as an income-generating asset, Magellan likely doesn’t have a great deal of upside when it comes to share price. The median target price among analyst forecasts is $54, just 5 percent higher than the current price of $51.27.

 

With a P/E ratio of 12.46, MMP is valued slightly above the industry average. Its price-to-book is also 6.08, considerably higher than the average of 2.89. This leaves little room for MMP to be considered undervalued. As a result, shareholders should expect almost all of their returns to come in the form of dividend payouts.

 

With regards to risk, there are two significant factors investors should be aware of. The first is a general lack of growth. While higher oil prices are helping revenues, earnings growth seems to have largely stalled out. The company’s tight focus on oil products could also present problems as alternative energy sources make up more of the American energy mix. Both of these headwinds could endanger the dividend, making the stock a somewhat risky income proposition.

 

Due to its extremely high yield, MMP is very likely worth the risks associated with it. The company’s management has successfully maintained the payout thus far, and there are no immediate signals of a dividend cut. At a nearly 8 percent yield, MMP could be a good hedge against current market volatility and a strong long-term income producer.

 

MPLX LP (NYSE:MPLX) is in a similar midstream business to Magellan. Like MMP, it provides transportation and logistics support for the fossil fuel industry. MPLX, however, has more exposure to natural gas. The stock yields a fairly astonishing 8.39 percent, producing a total annual dividend of $2.82 per share.

 

For Q1, MPLX reported $825 million in net income, a substantial gain from $739 million in the previous year. Operating revenue rose from $1.05 billion in 2021 to $1.27 billion in 2022. In addition to its substantial dividend payouts, MPLX also distributed $100 million to shareholders in the form of share buybacks.

Like MMP, MPLX pays a hefty amount of its earnings in dividends. The ratios, however, aren’t quite as high for this stock. MPLX pays 58.33 percent of its cash flow in dividends. While safer, this amount is projected to grow to 75.12 on forward cash flows in the coming year. Much like Magellan, MPLX supports its high dividend through a business model that produces strong cash flows.

 

Due to its lower payout ratios, MPLX may have more room to run with its dividend in the near future than MMP. However, it’s important to note the spike in the amount of cash flow the company is expected to spend on payouts. If MPLX continues to distribute more of its cash flow in coming years without growing by comparable amounts, it could find itself in a situation similar to MMP’s very quickly.

 

In terms of upside, MPLX is considerably more attractive than Magellan. Currently trading at $30.42, the stock carries a median price target of $37. This would represent a gain of 21.7 percent in addition to the already impressive dividend yield. Even the lowest price target puts the stock up by 11.8 percent at $34, indicating that there is considerable room for the share price to grow over the coming year.

 

MPLX also has somewhat better value metrics than MMP. The stock trades at a P/E ratio of 9.69 and a price-to-book of 2.78. These metrics support the likelihood of future share price growth as indicated by analyst forecasts.

 

MPLX’s exposure to natural gas offers it some insulation from risks associated with lower demand for gasoline and oil products. It is, however, still subject to broader risks from green energy transition. These risks could impact the payout down the line, especially if the payout continues to eat up a larger amount of forward cash flows.

 

Like MMP, MPLX has more than enough to recommend it to compensate for these risks. Between considerable room for share price growth and excellent income potential, MPLX should continue to reward investors.

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