The energy sector, sensitive to crude oil and natural gas prices, has done well for investors this year due to increased commodity prices.
In particular, with oil prices skyrocketing following the launch of the Iran war earlier this year, the S&P 500 Energy sector gained 40% this year, through June 8. Energy stocks' stock appreciation easily outpaced the S&P 500 ex-Energy's 22.9% increase.
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The rapid price gains make it challenging to find stocks in the sector trading at reasonable valuations. However, I've found two pipeline and transportation companies fit the bill.
Better still, they have high dividend yields and a history of raising payouts. That makes them attractive stock investments for their total return potential over an extended period.
1. Energy Transfer
Energy Transfer (NYSE: ET) transports oil and gas, including via pipelines, and stores energy, among other activities. That's a steadier business than exploration and production energy companies, whose results depend on commodity prices. Rather, Energy Transfer, while not immune to energy prices, relies more on transport volumes of natural gas and crude oil.
The company saw higher volume across businesses in the first quarter, and revenue grew 31.1% year over year to $27.8 billion. Its quarterly adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), a key metric used by management, increased 20.5% to $4.9 billion. That's also a proxy for cash flow.
Energy Transfer uses this cash flow to reward shareholders with ever-higher dividends. After slashing the payout in half in 2020, at the start of the pandemic, the board of directors has raised dividends quarterly for the last several years. That includes the first-quarter increase from $0.335 a share to $0.3375 a share.
At the new rate, Energy Transfer's shares have an attractive 7.2% dividend yield. That dwarfs the S&P 500 index's 1.1%.
Energy Transfer's shares have gained 13.8% this year, through June 11. That sounds good, but it trailed the overall energy sector. Still, investors can rely on a steadier business versus the highly volatile energy and production companies.
Although the stock's price-to-earnings (P/E) ratio has increased from 14 to 16 during this time, it's lower than the S&P 500 Energy's P/E multiple of 21.