Following some negative dividend action during the coronavirus-induced oil bear market of 2020, investors may not be thinking there are a lot of dividend growth opportunities in the energy patch.
Actually, the opposite is true, and among the various energy sector exchange traded funds, the Invesco DWA Energy Momentum ETF (PXI ) is a surprising avenue with which to access some of the fastest-growing, steadiest dividends in the energy complex.
PXI is a surprise on this front because it follows the Dorsey Wright® Energy Technical Leaders Index, which is a momentum-based index, and investors don’t readily associate momentum strategies with large dividends. Additionally, PXI’s 30-day SEC yield is just 1.06%, according to issuer data. That doesn’t scream “high-dividend,” but it also implies ample room for payout growth.
Amid competition from renewable energy sources and newfound emphasis on reduced capital spending, energy companies are returning more capital to shareholders by way of both buybacks and dividends.
“As a result, the energy sector’s dividends are growing faster than any other part of the U.S. equity market. Since 2018, the average dollar amount of dividends among energy companies has grown by over 50%. That’s up from just 5% growth for the prior three years. And since 2016, energy companies’ dividend amounts are up 80% for the five-year period,” says Morningstar analyst Lauren Solberg.
In recent years, some PXI components, including Diamondback Energy (FANG), EOG Resources (EOG), and Pioneer Natural Resources (PXD), grew payouts at impressive rates.
“Diamondback Energy (FANG) has raised its dividend roughly 370% in the past three years, EOG Resources (EOG) more than 500% and Pioneer Natural Resources (PXD) by more than 2,000%,” adds Solberg.
That trio combines for almost 8% of PXI’s weight. In the case of Pioneer Natural Resources, that company is using a variable dividend. That’s a prudent strategy for energy producers because it means they pay out more to shareholders when oil prices surge and less when those prices decline, indicating that there are benefits compared to fixed dividend payments.
Devon Energy (NYSE:DVN) and ConocoPhillips (NYSE:COP), which combine for 7.65% of PXI’s weight, also pay variable dividends. ConocoPhillips is looking to return $75 billion to investors “in the form of dividends over the next 10 years as long as the price of oil averages $50 per barrel (much lower than the current price of over $90 per barrel),” notes Solberg.
Bottom line: PXI could reward investors thanks to rising oil prices and more dividend growth than previously expected.
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