Dividend investors won’t want to overlook these 3 bargain stocks in 2024

2023 has been a good year for the stock market. But since stocks are more expensive in good performing years, opportunity seekers in 2024 may have to pay a premium for the best companies, especially growth stocks.

But there were parts of the market that weren’t looking so good for 2023. After surging in 2021 and 2022, energy stocks cooled last year. As a result, many energy companies with solid performance are trading at bargain prices.

Here’s why: devon energy (DVN -1.88%), diamondback energy (canine 1.62%)and ConocoPhillips (cop 0.63%) Here are three overlooked dividend stocks worth watching this year.

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Devon Energy’s dividends can help boost your passive income

Scott Levin (Devon Energy): Everyone loves a discount. But what if you want to find ultra-high-yield dividend stocks sitting in the bargain bin? It’s an opportunity that doesn’t come often. But fortunately for income investors, this is exactly the situation with Devon Energy. The energy exploration and production company’s shares are available for sale and have a dividend yield of 6.3% based on the current stock price.

Unlike oil majors that operate across the energy value chain, Devon Energy focuses solely on oil and natural gas production from assets located in the United States, including but not limited to the Delaware Basin, Eagle Ford Shale, and Anadarko Basin.

Cautious investors may be hesitant about the company’s ultra-yielding dividend, but after a closer look at the company’s financials, they may find that the dividend doesn’t represent as much risk as initially feared. Devon Energy’s dividend is split into a fixed dividend and a variable dividend based on the company’s free cash flow generation. Therefore, it is clear that the dividend is quite sustainable and does not jeopardize the company’s financial well-being.

DVN cash flow per share (annualized) data from YCharts.

This trend is expected to continue in 2024. In Devon Energy’s third quarter 2023 earnings call, management projected that the company would allocate 30% of its 2024 free cash flow to repaying debt and strengthening its balance sheet. We plan to return approximately 70% of free cash flow to shareholders.

Investors can take advantage of Devon Energy’s stock at a low price to strengthen their portfolios. The stock is valued at 4.4 times operating cash flow, a discount compared to the five-year average of 5.1 times.

Diamondback Energy seeks to generate more reliable dividends.

Lisa Maha (Diamondback Energy): Oil and natural gas exploration and production companies’ earnings, earnings, cash flow, and ultimately dividend prospects are driven by energy prices. While this statement rings true about Diamondback Energy, it would be a mistake to conclude that the stock is simply a leveraged play against the price of oil.

Diamondback Energy, similar to peer Devon Energy, strives to increase certainty about the outcome of its dividend by splitting the payout into a fixed base component and a variable component. For Diamondback, the current base dividend (protected at the price of oil at $40 per barrel using a hedge) is $0.84 per quarter. On an annualized basis, the quarterly base dividend would be $3.36, or a base dividend yield of 2.2% at the stock’s current price. According to management’s forecast, $40 per barrel is the lowest level one can expect.

But Diamondback is not a hedge fund. The downside hedge starts at $55 per barrel, meaning there is upside to oil prices above $55 per barrel. According to management’s final letter to shareholders, “We expect to realize more than 95% of WTI when WTI is at least $65 per barrel, with most quarters exceeding this figure.”

Management’s capital allocation policy includes returning free cash flow to investors after base dividends are paid and share repurchases are made, capped at 75% of total free cash flow. To give you a taste of the results of this strategy, Diamondback paid a $2.53 variable dividend in the third quarter, for a total dividend payout of $3.37. Annualizing this figure gives the stock a dividend yield of 8.6%.

Although it is unrealistic to expect such payments on an ongoing basis, it is reasonable to assume a rate of return (based on current stock prices) in the range of 2.2% to 8.6%, based on oil prices in the range of $40 to $80 per barrel. If you’re comfortable with that range, the stock is attractive.

ConocoPhillips is returning significant cash flow to shareholders.

Daniel Poelver (ConocoPhillips): There has been a lot of merger and acquisition (M&A) activity in the oilpatch over the past year. Enbridge Purchased three natural gas utilities from . dominion energy. ExxonMobil buying pioneer natural resources, chevron buying hessand Occidental Petroleum You are purchasing CrownRock. Over the past two weeks, what Announced acquisition of Callon Petroleum. And on Thursday, Chesapeake Energy announced a merger. southwestern energy.

Considering all the M&A activity, it may seem strange that ConocoPhillips, one of the largest exploration and production companies in the United States, has been relatively quiet. One reason is that ConocoPhillips completed its acquisition of Concho Resources in January 2021. This was a huge deal for ConocoPhillips, and in many ways it set the stage for the flurry of M&A activity that followed. But another reason is that ConocoPhillips tends to be quite conservative.

The company operates an efficient business centered on low production costs and high cash flow generation. ConocoPhillips, like its peers, faced stress tests in 2020. Surprisingly, even though WTI oil prices averaged less than $40 that year, ConocoPhillips generated positive free cash flow. Since then, ConocoPhillips has been working hard, including a record year of free cash flow in 2022.

COP Free Cash Flow (Annual) data from YCharts.

The company said in its third-quarter earnings call that it expects operating cash flow to reach about $22 billion in 2023 and plans to return half of that to shareholders. ConocoPhillips’ dividend payments consist of quarterly “ordinary” dividends and dividends that fluctuate based on business performance.

In 2023, ConocoPhillips will pay $2.11 per share in common dividends and $2.50 per share in variable dividends, for a total of $4.61 per share and a return of over 4% based on the current stock price.

This system works well for ConocoPhillips because its dividend obligations are usually relatively low. Therefore, there is no need to cut the underlying dividend even during periods of weak energy sector cycles. However, investors directly benefit when a company generates huge profits.

With a price-to-earnings ratio of just 12.2 and a price-to-free cash flow ratio of 13.1, ConocoPhillips is too cheap to ignore.