The energy sector is benefiting from strong oil and natural gas prices, a massive green flag for energy producers. The industry, where the largest names are renowned for their big dividend payments, is a tempting option for investors seeking out passive income. This sector, though, is known for its volatility, which can materialize in quick and dramatic price changes. Here's a look at the green flag supporting dividend-paying energy stocks today and the one factor that could quickly turn green into red. Essentially, you need to be careful about the stocks you pick here if you are looking for a reliable dividend stream.
In 2020, efforts to slow the coronavirus pandemic led to a steep drop in demand for oil and natural gas. Prices fell along with demand, resulting in a painful downturn for energy stocks. ConocoPhillips (NYSE: COP) , a pure-play energy producer, fell 38% that year, but was down more than 60% at one point. The drop isn't surprising, given that ConocoPhillips lost an adjusted $0.97 per share in 2020, down from a profit of $3.59 in 2019.
But this deep industry downturn helped to set up the current upturn, since it resulted in a material drop in capital investment throughout the energy sector. When demand came back, more quickly than some had expected, there was a mismatch between supply and demand that pushed oil and natural gas prices higher. Then geopolitical tensions rose, further exacerbating the supply shortfall. There's nothing that looks likely to materially alter these dynamics in the near term.
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1 Green Flag and 1 Red Flag for Passive Income Energy Stocks