2 Ultra-High-Yield Energy Stocks to Buy Hand Over Fist and 1 To Avoid

Oil and gas prices have skyrocketed this year. That’s giving energy companies more money to expand their operations and pay lucrative dividends. Several energy stocks offer much higher dividend yields than the S&P 500‘s relatively paltry 1.6% payout. 

A couple of ultra-high-yield energy stocks worth buying hand over fist these days are Crestwood Equity Partners (CEQP -3.79%) and Enterprise Products Partners (EPD -1.78%). Crestwood currently has a 9% dividend yield while Enterprise yields 6.8%. However, not all big-time dividends in the energy sector are worth buying. Investors should avoid BP Prudhoe Bay Royalty Trust (BPT 1.14%) and its 7.1%-yielding dividend.

Plenty of fuel to keep growing

Crestwood Equity Partners is a master limited partnership (MLP) that operates gathering and processing infrastructure across the country’s top three production regions. It generates steady fee-based income as oil, natural gas, and water flow through its pipelines and other infrastructure. That gives the MLP a steady cash flow stream to support its big-time dividend.

The company expects to generate enough cash to cover its high-yielding payout by at least two times this year. That’s enabling it to retain half its cash flow to expand its operations and strengthen its already solid balance sheet. This strong financial profile puts Crestwood’s payout on a sustainable foundation. 

Crestwood’s financial flexibility has also enabled the MLP to make several acquisitions in the past year. Earlier this year, it acquired fellow MLP Oasis Midstream Partners for $1.8 billion. That gave it the fuel to increase its payout by 5%. Meanwhile, the company recently bulked up its position in the Delaware Basin by purchasing Sendero Midstream Partners and buying out its partner’s stake in a joint venture. These deals will help grow Crestwood’s cash flow, which should help support future distribution increases. 

Remarkable consistency

Enterprise Products Partners is a large-scale MLP with diversified operations that provide very stable cash flow. The company generates enough cash to cover its ultra-high-yielding payout by a comfortable 1.8 times. That enables it to retain some money to fund its expansion program. The MLP also boasts one of the strongest balance sheets in the sector.

Enterprise has a long history of growing its distribution. The MLP notched its 23rd straight year of raising the payout in 2022. That upward trend should continue well into the future. Enterprise currently has $4.6 billion of major expansion projects under construction that should help grow its cash flow over the next several years. In addition, its strong balance sheet gives it the financial flexibility to make acquisitions. Enterprise spent $3.25 billion to buy Navitas Midstream Partners earlier this year. These investments should expand its cash flow to support continued distribution growth. 

This big-time dividend will come to an end

BP Prudhoe Bay Royalty Trust has a much different business model than Crestwood and Enterprise. As a royalty trust, it earns royalties from oil produced out of Alaska’s Prudhoe Bay. As such, it makes more money during periods of high oil prices, giving it more cash to pay dividends.

While the royalty trust provides investors with income upside potential, there are several drawbacks. Due to production costs and other expenses, the trust doesn’t always generate enough revenue to pay a distribution. That has happened several times in the past few years. 

Meanwhile, the oil-fueled revenue stream in Prudhoe Bay will eventually run dry. When that happens, the royalty trust’s dividend will cease. As it is, the royalty trust didn’t expect to be able to pay dividends in 2022, according to its latest annual report. However, it was able to because crude prices were high enough to make it profitable to produce from the region. That might not always be the case. Oil needs to be above $76.69 a barrel in 2023 to produce royalties for the trust and even higher to support future dividend payouts, which will fluctuate with crude prices and the trust’s costs. Because of that, it doesn’t offer a sustainable income stream like Enterprise and Crestwood.

Sustainability matters more than yield

Energy stocks are often a great place for investors seeking to collect a big-time dividend yield. However, they still need to be choosy, because not all high-yielding energy stocks can maintain their payouts, let alone grow them, which is undoubtedly the case with BP Prudhoe Bay Royalty Trust. Because of that, income investors should avoid that stock and load up on Enterprise and Crestwood instead.

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