Investors finding dividends in an unlikely place: Energy

Energy ETF’s dividend yield is beating utilities for just the second time in a decade.

  • By Asjylyn Loder,
  • The Wall Street Journal
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With interest rates poised to fall, investors are hunting for a way to squeeze a little more profit from their portfolios.

One popular refuge is staid utility stocks, which pay a steady stream of reliable dividends. But in an unusual twist, there is a better dividend payout from an unexpected source: risky energy companies.

The dividend yield on State Street Corp. (STT) ’s Energy Select SPDR exchange-traded fund is running about 3.4%, beating the 3.1% yield on the Utilities Select SPDR fund (XLU) for only the second time in a decade.

“Utilities are slow, stodgy companies that tend to maintain a dividend. Because they’re regulated, their earnings are stable,” said Todd Rosenbluth, head of fund research for CFRA. “Energy is the opposite of that.”

The reason for the yield reversal is hidden under the hood of the energy ETF. Yes, its portfolio includes laggards like Noble Energy Inc. (NBL) and Concho Resources Inc. (CXO), whose stock prices have fallen sharply in the past year.

But its two biggest holdings are Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX), which together account for more than 40% of the fund’s investments. The two major oil companies deliver such reliable dividends that they have even earned spots in the ProShares S&P 500 Dividend Aristocrats ETF (NOBL), which restricts its roster to firms that have increased their dividends for at least 25 consecutive years.

Still, dividend yield is just one consideration. In the past year, the energy ETF has lost more than 12% while the utility fund has returned nearly 20%, handily beating the 10% gain of an S&P 500 ETF.

“If you’re seeking income, the energy sector is a more appealing place than it has historically been,” said Mr. Rosenbluth. “But that comes with risk.”

In fact, the lackluster performance of energy stocks combined with gains for utilities is a big part of the reason why yields have flipped, said Shahriar Pourreza, a managing director at Guggenheim. The yield is calculated by dividing the dividend per share by the stock price. The demand for utility stocks from risk-averse investors has driven prices higher, sending yields down, he said.

“The reason the yield is lower than you would think is because utilities are popular,” Mr. Pourreza said.

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