Stocks with high dividend yields can be great long-term opportunities. But they can also be risky and investors need ot think carefully about which ones are which.

Global oil

On both sides of the Atlantic, shares in oil companies have been among the hardest-hit in the last week. And reciprocal trade tariffs from the US are only part of the reason.

Source: Trading Economics

Following ‘Liberation Day’, analysts at JP Morgan estimate the chance of a global recession in 2025 to be 60%. This isn’t a positive sign for short-term oil demand.

But this isn’t the only issue. In the last week, eight OPEC+ members reported plans to boost oil production. This should result in 411,000 extra barrels per day in May (rather than 135,000).

Combining increased supply with subdued demand is a formula for lower oil prices. And that’s why energy has been the worst-performing sector in the S&P 500 over the last week.

BP

In the UK, things have been largely similar. BP (LSE:BP) has seen its share price fall 14% in the last week, while the FTSE 100 is down around 7%.

As a result, the stock now has a 6.5% dividend yield, which I think is worth paying attention to. Especially for investors with a positive long-term view of oil.

The situation with BP is complicated. Activist investor Elliott Management is pushing the firm to divest some of its operations including – but not limited to – its renewables division.

I like the strategy, but I’m not sure that now is a good time to be selling wind and solar assets. Renewables have been under pressure recently and this is enough to make me look elsewhere.

Chord

Chord Energy (NASDAQ:CHRD) is a more straightforward organisation. The company’s exclusive focus is on getting oil out of the Williston Basin as cheaply as possible.

Importantly, it’s also intent on returning as much cash as possible to shareholders. As long as its leverage ratio stays below 0.5, the firm plans to return 75% of its free cash flow to investors.

Towards the end of 2024, this ratio was 0.3, but there’s a risk lower oil prices could threaten this position. Even if debt levels stay the same, lower profits could push the ratio higher.

This is something investors should take seriously. But I think Chord’s clear focus on extracting oil and returning cash to shareholders makes it preferable to BP, for me at least.

I’m buying

In the space of about a week, things have changed dramatically for oil companies. Supply is up, demand is down, and crude prices have fallen sharply as a result. 

One thing this shows, however, is that things can change suddenly. And the current situation might be about as bad as it gets for oil stocks.

The risk is that things stay this way for some time. But I see discounted prices across the sector as an unusually good buying opportunity.

BP might be a decent stock to consider, but I prefer Chord’s uncomplicated focus on oil and cash flows. So if prices stay where they are, I’ll be adding to my existing investment later this week.

The post As collapsing share prices send dividend yields soaring, which income shares look attractive? appeared first on The Motley Fool UK.

Chord Energy’s (NASDAQ:CHRD) the largest independent oil producer in the Williston Basin. And it has a different approach to the big oil majors.

Investor returns

Based on $70 oil prices, the company anticipates returning $13 per share to investors in 2024 via dividends and share buybacks. With the share price currently at $119, that’s a return of almost 11%.

Source: Chord Energy Q3 Investor Presentation

Investors should note a couple of risks though. A similar outcome in 2025 is absolutely not guaranteed – lower taxes in the US might well increase oil supply and this could send prices lower.

On top of this, Chord doesn’t specify the break-even price of its assets in its investor materials. This makes it difficult for investors to assess what the effect of lower oil prices might be. 

This makes it a riskier investment than I usually go in for. But I think the opportunity might be unique and it’s a risk I’m willing to take as part of a diversified portfolio.

What makes Chord different?

What makes Chord – potentially – unique is it doesn’t invest heavily in exploration projects. Unlike the likes of ExxonMobil and Chevron, it focuses on returning profits to shareholders.

The obvious limitation to this strategy is that oil wells don’t last forever. And when they run out, the company needs to find ways to replace them, otherwise its profits will dry up. 

Rather than funding speculative projects, Chord prefers to do this by acquiring other businesses with established assets. The most recent example is its $4bn purchase of Enerplus in May. 

Growing like this can put the firm’s balance sheet at risk. But the company’s actually in a very strong position, with a leverage ratio around a third of the level of its peers and a fifth of the S&P 500 average. 

UK oil

Both Shell (4.5%) and BP (6.1%) have attractive dividend yields at the moment. And as a UK investor, I’m set to pay a 15% withholding tax on distributions I receive from Chord.

On top of this, I strongly suspect both the UK oil companies have lower production costs. And this gives them a clear advantage over the firm I’ve been buying shares in. 

Despite this, I think the higher windfall taxes BP and Shell are going to have to deal with next year – and beyond – is likely to offset this. These got tougher in the Budget and look pretty durable to me. 

By contrast, Chord’s (along with other US companies) likely to face lower taxes in 2025. And this should mean its production costs – whatever they are – come down. 

I’m buying

I see Chord as one of the riskiest investments in my Stocks and Shares ISA, but I’m still buying gradually. What happens if oil prices fall is unclear. 

From a passive income perspective though, I think the potential reward means the risk’s worth it. If oil prices just stay above $70, this is an investment that could turn out extremely well for me.

The post If oil prices climb in 2025, this stock’s set to gush passive income appeared first on The Motley Fool UK.

Both could turn out to be brilliant investments – as they have been in the past. But the best dividend shares, in my view, are the ones that actively look to return cash to shareholders. 

Chord Energy

Chord Energy‘s (NASDAQ:CHRD) is a good example. Its balance sheet is in a strong position and this means the company has committed to returning 75% of its free cash to investors. 

One of the reasons billionaire investor Warren Buffett likes Occidental Petroleum is that the company doesn’t burn cash on expensive exploration projects. Instead, it distributes it to shareholders. 

Chord’s operations are mostly situated in the western US’s Williston Basin. This means its extraction costs are likely to be higher than Occidental’s, which is based in the southwestern US’s Permian Basin. 

That’s the biggest risk with the business. It means changes in the price of oil – especially downwards – are likely to have a much larger effect on the firm’s profits and dividends.

Investors that don’t have a positive view on oil prices should probably avoid buying shares in Chord – or any other oil producer. But I think the long-term picture’s encouraging.

Given this, I think the stock could be a great source of passive income. I bought shares in November and intend to add to my investment in December. 

Primary Health Properties

Primary Health Properties (LSE:PHP) is another company I’m buying and that’s literally designed to return cash to shareholders. It’s a real estate investment trust (REIT) that owns and leases GP offices. 

As an asset class, REITs originated in the US in the 1960’s. Their aim was to allow ordinary people to participate in (what was then) a booming property market.

In general, REITs make money by leasing properties to tenants. And in exchange for tax exemption, they are required to distribute 90% of their profits to shareholders as dividends.

That can make them a reliable source of income. And this is especially true with Primary Health Properties, which maintains high occupancy levels from the NHS. 

This limits the risk of a rent default, but there’s a significant risk. Not being able to retain its cash means growth has to be financed with debt and that shows up on the firm’s balance sheet.

The danger of Primary Health Properties having to issue shares is one to take seriously. But with a dividend yield of over 7%, that’s a risk I’m willing to take at today’s prices.

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Passive income

Growth-focused businesses can be great passive income investments. But I think some of the best opportunities right now are in companies that look to distribute their cash to shareholders. 

Chord Energy and Primary Health Properties are two examples of this. And while they’re not the most well-known stocks, they’re my top dividend opportunities for December.

The post 2 top dividend shares to consider buying in December appeared first on The Motley Fool UK.

From an investment perspective, the S&P 500 looks risky right now. A heavy concentration in some expensive names has more than one analyst forecasting weak returns for the next 10 years.

That might cause investors to turn away from the US when looking for opportunities. But I think that’s a mistake – outside of the index, there are some stocks I like the look of very much. 

An oil company

One example is Chord Energy (NASDAQ:CHRD). Earlier this year, the company merged with Enerplus to form the largest oil producer in the Williston Basin.

My thesis here is relatively straightforward. Management reports its assets will allow it to extract oil for 10 years at low prices and I think this is going to make for strong investor returns.

Chord’s balance sheet is extremely strong. And that allows the company to return significant amounts of the cash it generates to investors through dividends and share buybacks.

This sets it apart from other oil stocks and makes it very attractive from my perspective. I think it looks like a bargain even when US stocks as a whole are at historically expensive levels.

Production

Chord’s position in the Williston means its costs are higher than its counterparts that are based in the Permian. But I think there’s still plenty for investors to be excited about. 

Back in August, the firm anticipated generating around $700m in free cash this year based on a $70 oil price. And from next year, that should be boosted by synergies from the Enerplus transaction.

Since then, West Texas Intermediate (WTI) has dropped to around $67 per barrel. But Chord’s market cap is currently under $8bn, which I think makes things very interesting.

At that level, there could well still be a very good free cash flow return available to investors even if oil prices have further to fall. But there’s more to the story than this. 

Dividends

Instead of exploration, Chord looks to return its free cash to shareholders. The firm aims to keep its leverage ratio below 1 and sets its dividend policy based on how well it achieves this.

Source: Chord Investor Presentation August 2024

Right now, the company has a net debt-to-EBITDA ratio of 0.3. At that level, 75% of the free cash the company generates gets returned to investors as dividends.

A positive view on the outlook for WTI is a necessary condition of investing in oil stocks at all. But if the oil price stays above $70 for the next 10 years, things could be very interesting.

If I invested £1,000 today, I think there’s a chance I could get 100% of that back in dividends in the next 10 years. And with interest rates falling, there aren’t many opportunities like that. 

A stock to consider?

There are plenty of reasons to be uncertain about the outlook for oil prices. Right now, the biggest threat is probably increased production from OPEC at a time when demand is weak.

Investors with a positive outlook for oil might want to take a look at Chord Energy, though. US stocks in general might be expensive, but I think there’s still excellent value on offer here.

The post Forget the S&P 500 – here’s an under-the-radar US stock that I think looks like a bargain appeared first on The Motley Fool UK.