Oil prices have been on the rise, bringing energy stocks back into focus. However, the volatility in the market can be both a source of potential gain and a risk of losses. Investors need to be cautious and adopt well-thought-out strategies to navigate these uncertain times. One strategy that some investors are employing is focusing on dividend-paying energy stocks to generate passive income.
While the average dividend yield of S&P 500 companies stands at 1.5%, many energy companies offer significantly higher yields, making them attractive options for income-focused investors. Here, we will take a closer look at two high-yield energy stocks that are favored by Wall Street analysts.
Sunoco LP (NYSE:SUN) is a major player in America’s wholesale motor fuels distribution, refined products transportation, and storage business. Structured as a master limited partnership, Sunoco distributes motor fuel to thousands of convenience stores, independent dealers, commercial customers, and distributors across 40+ states. Currently, the partnership offers a quarterly distribution rate of 84.2 cents per unit, resulting in an impressive annual yield of 7.3%. In the second quarter of 2023, Sunoco generated $175 million in distributable cash flow, with 1.9 times coverage for its quarterly payout to partners. The stock has already seen a 7% rise this year, and analysts expect further gains, with a Buy rating and a $53 price target from Mizuho analyst Gabriel Moreen.
Energy Transfer LP (NYSE:ET) owns one of the largest portfolios of energy assets in the U.S., including approximately 125,000 miles of pipelines and associated energy infrastructure. The partnership has a strategic network that covers 41 states and all major production basins in the country. As an affiliate of Sunoco, Energy Transfer holds the general partner interests, incentive distribution rights, and approximately 34% of the outstanding common units of Sunoco. Energy Transfer recently announced a quarterly cash distribution of 31 cents per unit, resulting in an annual yield of 9.1% at the current unit price. In the second quarter, Energy Transfer’s distributable cash flow attributable to partners totaled $1.55 billion, with an excess cash flow after distributions of $579 million. Analyst Robert Kad from Morgan Stanley has an Overweight rating on Energy Transfer and a price target of $17, implying a potential upside of 25%.
In summary, for investors looking to generate passive income from the energy sector, Sunoco LP and Energy Transfer LP offer attractive high-yield opportunities. Sunoco, with its 7.3% annual yield and anticipated future gains, and Energy Transfer, with its impressive 9.1% annual yield and potential upside, could be compelling options for income-focused investors.
– Dividend Yield: The annual dividend income per share divided by the market price per share.
– Master Limited Partnership (MLP): A business structure that combines the tax benefits of a partnership with the liquidity of publicly traded securities.
– Distributable Cash Flow: The measure of cash generated by a business that is available to be distributed to its owners or partners.
– Upside: The potential increase in the price of a stock or investment.