Oil prices took a historic plunge this year. At one point, they even went negative. Investors lost their minds.
But would you believe this unprecedented crisis can actually be good for some oil companies?
Crude has plunged 46%, from above $60 to near $15. That’s accompanied a huge sell-off in top oil stocks like Royal Dutch Shell Plc. (NYSE: RDS.A).
But that does not mean it’s time to ignore oil.
You just have to shift your strategy a bit.
Today, we’re going to show you a dividend stock that actually benefits from plummeting oil prices.
It’s all thanks to a concept called “contango.”
Contango is the when the spot price of a commodity is down, but the market expects a big surge in the future. If you own oil, it makes more sense to keep it in storage until prices rebound than to sell it for pennies. This is exactly what we’re seeing in the oil market right now.
And we’re going to show you the best dividend stock for you to start earning on this trend.
Our stock today has a massive dividend yield of 17.26%. A dividend that high would normally be a red flag. But it makes more sense when you see how this company makes money…
Contango Makes This a Top Dividend Stock
The coronavirus did its part to sink oil by reducing travel. OPEC and Russia did their part in failing to reach a supply agreement – a price war sunk oil further while Russia refused cuts for several weeks.
OPEC and Russia recently agreed on an oil supply cut in attempt to stabilize the price. The 20% cut to 10 million barrels per day is the biggest ever, according to Reuters.
But regardless of what OPEC does from here, this dividend stock is a great play to hold you over for a few months while nations are still reacting to the coronavirus outbreak. This company actually collects money while the oil producers bleed it.
Oil futures climbed 25% to around $20 Thursday, while the spot price of WTI Crude and Brent Crude is around just $15. That’s contango.
It signals that supply cuts have not been enough. And because demand is weak, oil producers have nowhere to put their oil.
But guess what? That’s great news for companies that exist specifically to harbor excess oil reserves.
Right now, there’s a huge run on storage for excess oil supply. Oil drillers will continue to funnel their product in the direction of tankers to hold while the price recovers over the next few months.
And our top dividend stock today is a favorite in that industry. That means it’s rolling in cash right now. So the high dividend is no concern at all, but a reason to buy.
Now, here’s that 17% dividend stock…
The Dividend Stock to Buy While Oil Is Down
Frontline Ltd. (NYSE: FRO) is the world’s largest oil tanker shipping company. It’s based in Hamilton, Bermuda.
The company operates ships called VLCCs, or “very large crude carriers.” But while oil prices are taking a hit, analysts are calling this company a “very large cash cow.”
Frontline is one of the premier companies carrying excess fuel supplies. And recently, the company provided a very optimistic forward-looking statement.
Lately, there has been greater demand for storage and transport. Frontline says tanker demand “increased by 7% overnight” as Russia was fighting to increase production and sunk the oil price in March.
And reports are that the eventual agreement between OPEC and Russia was “too little, too late.” The effects of the price war had already rippled to the U.S. oil market, which announced “roughly $50 billion in spending cuts” over March, according to The Wall Street Journal.
That creates a lot of room for tanker companies like Frontline to swoop in and collect rents from oil companies with nowhere else to keep their oil. And Frontline is in great position to pay investors while that happens.
Frontline has paid $6 billion in dividends since 2001. It’s generated $890 million per year in cash, up from $228 million. That looks like growth from $1.15 to $4.50 per share.
And it’s been rising thanks to the company’s heaping free cash flow of late. From 2018 to 2019, its free cash flow went from -$170 million to +$84 million – good reason to trust a 17% dividend.
You could say the stock is also at a nice discount right now, down 29% from $12.94 to $9.14 on broad market hype. If you’re looking for a slight pop in share price, along with an unusually large dividend payment over the next few months, don’t ignore Frontline.
Action to Take: The oil industry is suffering from the “contango” phenomenon, when futures prices are higher than spot price. Frontline Ltd. (NYSE: FRO) is a great way to collect income on this struggling market while prices are down. The stock has a 17% dividend yield, and you can buy it for just $9 today.
— Mike Stenger
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Source: Money Morning