The Energy sector is renowned for its inherent volatility, characterized by abrupt positive upswings and crashes. While dramatic price fluctuations have long been a hallmark of oil and natural gas investments, the level of uncertainty has significantly escalated in recent years, particularly in the aftermath of the COVID-19 pandemic.

In an erratic energy market setting, you might consider high-quality dividend stocks like HF Sinclair (DINO Quick QuoteDINO - Free Report) , ExxonMobil (XOM Quick QuoteXOM - Free Report) and Diamondback Energy (FANG Quick QuoteFANG - Free Report) to fetch a promising income stream.

The Allure of Dividend Stocks to Navigate Unpredictable Energy Prices

In the tumultuous energy market journey, crude oil swung from a historic low of minus $38 a barrel in April 2020 to a remarkable high exceeding $130 per barrel in March 2022. However, recent times have proven challenging for "black gold." Concerns about demand and global economic slowdown led to a slump, though prices rebounded to nearly $80 following anticipated OPEC+ production cuts.

Natural gas mirrored this volatility, hitting a 25-year low in June 2020, surging to $10 per MMBtu in August 2022, and now trading below $3 due to mild winter forecasts and ample supplies.

The unpredictability of stocks, influenced by sudden market shifts, underscores the risk in stock picking. Amid Wall Street's uncertainty, dividend investing has gained prominence. Dividend stocks offer a reliable income stream, acting as a cushion against market risks. Known for lower volatility, they are a dependable choice for long-term investment, providing not only a steady income but also protection against equity market uncertainties.

Investors favor dividend stocks for wealth creation, as regular payouts act as a hedge in times of economic uncertainty, offering consistent yields. Additionally, the growth of dividends serves as a strategy to counteract the value erosion amid the current high inflationary environment. In the face of market unpredictability, the allure of dividend stocks remains a steadfast strategy for investors seeking stability and income in their portfolios.

How to Pick the Best Dividend Stocks?

Although the benefits of dividend investing cannot be stressed enough, one should keep in mind that not every company can keep up with its dividend-paying momentum. Hence, a cautious strategy needs to be followed to select the best dividend stocks with the potential for steady returns.

To guide investors to the right picks, we are recommending stocks with a payout ratio of less than 60 and a dividend yield of at least 2%. Moreover, these companies have hiked their dividends over the past five years.

Calculated by dividing dividend per share by earnings per share, the payout ratio indicates how comfortably a firm can pay the dividend from its earnings. It is one of the key metrics that dividend growth investors consider when looking for potential investments. A payout ratio below 60 looks quite sustainable and leaves enough scope for future dividend hikes.

With our objective to build a dividend income portfolio, we look for companies that have at least better yields than the S&P 500. A representative of the broader market, the index currently yields 1.42%. While our yield criterion isn't very high, it’s at a level where the company can weather all kinds of commodity price environments and provide a reliable income stream to investors.

Finally, we only consider stocks that have a consistent dividend, i.e., paying and increasing offerings over the past five years. It also acts as an indicator of what to expect from the company in the next few years on the payout front.

Our Choices

We have used the above criteria to narrow down three dividend-paying energy stocks.

ExxonMobil: ExxonMobil is one of the largest publicly traded oil and gas companies in the world, which participates in every aspect related to energy — from oil production to refining and marketing. XOM’s dividend of 95 cents per share ($3.80 annualized) represents a 3.64% yield. ExxonMobil’s payout ratio is 35, with a five-year dividend growth rate of 1.63%. (Check ExxonMobil’s dividend history here)

The Zacks Rank #2 (Buy) company is valued at some $414.1 billion. The Zacks Consensus Estimate for XOM’s 2023 earnings has been revised 3.7% upward over the past 60 days. ExxonMobil, headquartered in Irving, TX, has a trailing four-quarter earnings surprise of roughly 0.6%, on average. XOM shares have lost 8.1% in a year.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
 

HF Sinclair Corporation: A producer and marketer of gasoline, diesel fuel and other specialty products, HF Sinclair pays out a quarterly dividend of 45 cents ($1.80 annualized) per share that gives it a 3.32% yield at the current stock price. The Zacks Rank #3 (Hold) company’s payout ratio is 15, with a five-year dividend growth rate of 7.1%. (Check HF Sinclair’s dividend history here)

DINO is valued at some $9.8 billion. The Zacks Consensus Estimate for HF Sinclair’s 2023 earnings has been revised 2.6% upward over the past 60 days. The downstream operator has a trailing four-quarter earnings surprise of roughly 10.9%, on average. DINO shares have lost 16.4% in a year.
 

Diamondback Energy: Diamondback Energy is an independent oil and gas exploration & production company with its primary focus on the Permian Basin. FANG’s third-quarter dividend of $3.37 per share comprises 84 cents ($3.36 annualized) in regular payout plus a variable cash component of $2.53 apiece. The regular component represents a 2.15% yield. Diamondback’s payout ratio is 18, with a five-year dividend growth rate of 49.5%. (Check Diamondback Energy’s dividend history here)

Diamondback, carrying a Zacks Rank of 3, is valued at some $28 billion. Diamondback, headquartered in Midland, TX, has a trailing four-quarter earnings surprise of roughly 0.4%, on average. FANG shares have gained 3.4% in a year.