Want $1,000 in Passive Income? Invest $3,000 in These 3 Energy Dividend Payers and Wait 5 Years.

The S&P 500 yields just 1.3%, as growth companies that don't pay dividends or that sport low yields have grown to make up a larger portion of the index. Investors who use dividends to supplement income in retirement or rely on a passive income stream for financial planning may turn to other pockets of the market for a higher yield.

The energy sector has a nice balance of yield and value, as many oil and gas companies reward their shareholders with dividends and feature inexpensive valuations.

Here's why Phillips 66 (NYSE: PSX), Chord Energy (NASDAQ: CHRD), and the Global X MLP ETF (NYSEMKT: MLPA) stand out as three excellent dividend-seeking options.

Image source: Getty Images.

Phillips 66 earnings aren't as bad as they seem

Daniel Foelber (Phillips 66): Refining and midstream giant Phillips 66 reported its third-quarter 2024 earnings on Oct. 29. Earnings per share came in at just $0.82, but the adjusted figure was $2.04.

Companies will often adjust earnings to account for non-recurring expenses or charges that don't reflect operations.

In Phillips 66's reconciliation of consolidated earnings, the company noted a whopping $605 million in legal accrual expenses, with the footnote saying the legal accrual is "primarily related to ongoing litigation." The charge seems to be related to a recent ruling. On Oct. 17, a California jury ruled in favor of Propel Fuels inc., concluding that Phillips 66 should pay $604.9 million for exploiting confidential data and stealing trade secrets from the low-carbon fuels provider.

The expense is a blow to Phillips 66's results and reputation. Even without the charge, Phillips 66 is far from the top of its game. As you can see in the following chart, sales have slowed, and operating margins have been crushed as Phillips 66 navigates a difficult pricing environment, unfavorable crack spreads, and more.

PSX Revenue (TTM) data by YCharts

So, with all the bad news, you may be wondering why the downstream dynamo is a buy now. Phillips 66 is taking necessary measures to lower its leverage and improve its cost structure. It is selling assets in Switzerland (and maybe Germany and Austria) and closing its poorly performing refinery near the Port of Los Angeles.

In June 2023, it completed its acquisition of DCP Midstream for $3.8 billion. In the recent quarter, Phillips 66 achieved its $400 million run-rate synergy target related to the acquisitions. In total, it achieved run-rate cost savings of $1.4 billion -- which should help improve profitability even with lower refining margins.

Additionally, the stock price has been crushed and is down to its lowest level year to date. The sell-off has pushed the dividend yield up to 3.8% -- which is an enticing level for income investors.

Phillips 66 has distributed $12.5 billion in buybacks and dividends since July 2022, on pace to deliver on its target of $13 billion to $15 billion in capital return by year's end. Going forward, it plans to distribute around 50% of operating cash flow to shareholders through buybacks and dividends.

All told, Phillips 66 seems to be improving the quality of its portfolio, even at the expense of some sloppy near-term results. The sell-off is a buying opportunity for patient investors looking to boost their passive income from this industry leader.

Chord Energy's generous dividend is music to income investors' ears

Scott Levine (Chord Energy): There are the usual suspects of dividend oil stocks, and then there are lesser-known names that also warrant attention. This is the case with Chord Energy. Positioned at the upstream end of the energy value chain, Chord Energy, and its 9.1% forward-yielding stock, will certainly have many investors taking notice. It's the company's interest in maintaining its financial health as well as returning capital to shareholders, however, that makes it a compelling investment proposition. The company's exceptional free cash flow, moreover, provides the icing on the cake.

By operating upstream assets in about 1.3 million acres of the Williston Basin, Chord Energy generates revenue from the production of oil, natural gas, and natural gas liquids. It's the former, however, that provides the lion's share of the company's revenue, approximately 96% based on second-quarter 2024 financial results. From these assets, Chord Energy generates substantial free cash flow, an average of $1 billion annually over the past three years. This means little, though, without some context. Consider the companies in its peer group: Coterra Energy, Marathon Oil, Ovintiv, and Permian Resources. Of these, Chord Energy has the highest free cash flow yield.

CHRD Free Cash Flow Yield data by YCharts.

Strong free cash flow should extend into the near future. If the oil benchmark, West Texas Intermediate, averages $70 per barrel in 2024, management forecasts a 2024 free cash flow yield of 9%, rising to 12% if the price averages $80 per barrel.

With regards to the dividend policy, management strives to be judicious about returning capital. If Chord Energy has a net debt-to-earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio over 1, it pays a base dividend. If the ratio drops under 1, Chord Energy pays the base dividend plus 50% of free cash flow. If the leverage ratio falls below 0.5, the company will return the base dividend and 75% of free cash flow.

Chord Energy hits the right notes for income investors interested in playing in the oil patch.

This ETF offers a relatively safe way to invest in energy infrastructure

Lee Samaha (Global X MLP ETF): New realities require a new investing thesis. That's the approach behind looking at investing in midstream pipelines and storage facility stocks. To be clear, I'm not arguing that the clean energy transition won't occur. However, I argue that it will take longer than expected, and natural gas will have a significant role in the U.S. and global energy sectors for decades to come.

Putting it very crudely (not adjusting for inflation and discount rates), if this ETF's current quarterly distribution of $0.90 is sustainable, it will take a little over 13 years to generate the dividends equivalent to your initial investment.

While there's no guarantee that will happen, and investment in natural gas is subject to political considerations, the need for widely available, reliable, non-intermittent energy sources, such as gas, to act as a transition fuel and keep energy prices low is also a political consideration.

This ETF offers a way to diversify the stock-specific risk of buying any one midstream pipeline and storage stock. It currently holds 20 master limited partnership (MLP) stocks (MLPs don't pay corporate income taxes and tend to pay high dividends) with a pure focus on midstream pipeline and storage facility companies that tend to generate stable income from long-term contracts. With a total expense ratio of just 0.45%, it's an inexpensive way to gain exposure to an exciting high-yield sector.

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Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in any of the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.