Last week, we discussed the ” Dogs of the Dow (and S & P 500) ” investment strategies, in which investors rank the stocks in the respective indices by their dividend yield at the end of each year and rebalance into those with the highest yields. Because this strategy involves selecting the highest dividend-yielding stocks from the S & P 500 , it is potentially attractive for income-focused investors. Dividend yield, representing the annual dividend payout as a stock price percentage, is a key metric in this strategy. While high-yielding stocks can be risky, thorough research into a company’s financial health can help mitigate these risks. Last week, for example, we noted that most of the top 10 highest dividend yields in the S & P 500 are from companies whose revenue growth has failed to keep pace with the nominal gross domestic product growth or inflation, meaning that those companies were shrinking in real terms. As we also pointed out in our earlier article, cyclical businesses, such as those that are heavily tied to commodity prices, may not see consistent revenue or earnings growth from one year to the next. However, these companies may exhibit favorable revenue, earnings and free cash flow growth using a longer-term trendline that accounts for the fluctuations through the business cycle. This column is the second in a series of three on trade ideas involving the “dogs.” Energy’s lackluster performance in 2024 The energy sector materially underperformed the S & P 500 in 2024, with a total return of about 8.7%, including dividends. The price of oil, which has remained unchanged since early 2022, isn’t helping. Looking at the primary drivers of oil supply and demand, it isn’t difficult to see why. Global oil demand growth has not kept pace with economic growth, even as oil and gas production in the United States, the world’s largest energy producer, hit all-time highs . Stagnant demand with ample supply is a poor recipe for higher oil prices. That said, accessible and affordable energy is more broadly positive for the global economy, and business optimism has improved since the election. The December 2024 IEA Oil Market Report estimates that global oil demand growth is set to accelerate, “lifting consumption to 103.9 mb/d in 2025.” Meanwhile, OPEC+ delayed unwinding its additional voluntary production cuts by three months. Overall, global oil markets appear well-supplied, so a significant uptick in oil prices isn’t anticipated. Nevertheless, several energy companies, including a couple with high-dividend yields, have been performing well enough, even with sub-$70 per barrel oil prices to warrant a look. One of these is Houston, Texas-based exploration-and-production company ConocoPhillips . The company — which completed its acquisition of Marathon Oil for just under $23 billion on Nov. 22 — is likely to return more than $10 billion to shareholders between dividends and share buybacks in 2025, more than 8% of the company’s current market capitalization. Conoco is trading close to its longer-term average historical multiples at around 12-times forward earnings estimates and 4.9-times EV/EBITDA. COP YTD mountain ConocoPhillips in 2024 Revenues and earnings have been quite volatile — as expected for an oil company — but both are considerably higher than five years ago. For example, the FY 2025 revenue estimates of roughly $60 billion are more than 80% higher than FY 2020 revenues of $32.6 billion. The company’s consistent dividend growth since 2015 should be maintainable with a strong balance sheet. One way to get some long exposure to the stock while collecting some additional income above and beyond the dividend in options premiums is with a “buy-write.” The options trade A buy-write is an options trading strategy involving buying a stock and selling a call option. Investors who seek to generate additional income from their stock holdings while limiting potential upside gains often use this strategy. I favor keeping the short call in a buy-write strategy short-dated and prefer to avoid writing options through quarterly earnings releases, catalysts when a stock can move sharply. Because a buy-write involves owning the underlying stock, it requires equity risk, for which investors should be sufficiently compensated. One should choose call strikes that provide some upside potential for capital appreciation. One can currently purchase Conoco stock for about $95 a share while collecting more than 1% of the current stock price ( > 12% annualized) for selling the $100 strike calls, which expire well before the company’s next estimated earnings release in February 2025. Although selling the upside calls does cap potential gains over the next several weeks, between the $1.05/share one should collect for selling the calls and the roughly $5 difference between the current stock price and the strike of the calls, the maximum potential gain between now and January expiration is more than 6% of the current stock price. DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
This energy stock offers a high dividend yield — Boost income with options