The S&P 500 (^GSPC 0.16%) is just a few percentage points off a record high, sports a relatively expensive valuation, and is coming off back-to-back years of massive gains. But many energy stocks have inexpensive valuations and high yields, making them good buys for value and passive income investors.
ConocoPhillips (COP -0.05%), Kinder Morgan (KMI 1.73%), and Phillips 66 (PSX 0.92%) all have compelling valuations and yield over 3%. Investing $1,000 in each stock should generate about $112 in passive income in 2025 based on the yield of each stock at the time of this writing. Here's why all three dividend stocks are great buys now.
Image source: Getty Images.
The upstream play
ConocoPhillips is the largest U.S.-based independent exploration and production company by market cap. The company's production has dramatically increased in recent years due to organic investments and two blockbuster acquisitions -- Concho Resources and Marathon Oil. ConocoPhillips completed its acquisition of Concho in January 2021, and Marathon Oil was completed on Nov. 22, 2024. So 2025 will be the first full year of results post-Marathon acquisition.
ConocoPhillips has a sizable and highly efficient production portfolio that allows it to break even even at relatively low oil and gas prices. Like it did with Concho, ConocoPhillips expects synergies with Marathon to further reduce its production costs. Even including its dividend expense, ConocoPhillips expects to achieve breakeven free cash flow (FCF) at low $40s per barrel of oil equivalent (boe). Without including the dividend, the FCF breakeven is in the low $30s per boe.
ConocoPhillips already has a solid yield of 3.1%. But investors can expect even more passive income going forward, as ConocoPhillips expects its dividend growth rate to be in the top 25% of S&P 500 companies.
Oil prices had a mediocre year in 2023. But even in that operating environment, ConocoPhillips continued to rake in the earnings and FCF. The stock sports a price-to-earnings ratio of just 12.1 and a price-to-FCF ratio of 12.9 -- making it a great value for folks who believe oil prices will stay around these levels or even lower.
By investing $1,000 in ConocoPhillips, you can expect to earn about $31 in passive income in 2025.
The midstream play
Kinder Morgan stock surged over 50% in 2024 -- massively outperforming the major indexes and the broader energy sector. The breakout can be attributed to years of underperformance, growing earnings, and a change in sentiment toward the company's long-term growth projects.
Kinder Morgan operates in the midstream part of the oil and gas value chain. Its energy infrastructure assets, from pipelines to storage to terminals and more, connect areas of hydrocarbon production to areas of processing, distribution, and consumption.
Kinder Morgan has to see greater demand for oil and gas production to justify building more infrastructure. Concerns regarding the role of oil and gas in a cleaner energy future led investors to question the value of Kinder Morgan's infrastructure and its ability to put capital to work in profitable projects to justify paying a high dividend. But sentiment seems to have shifted.
Oil and natural gas could play a key role in the energy mix for decades to come, especially if the total amount of energy consumed is expected to accelerate due to economic growth and demand from artificial intelligence (AI) applications. Kinder Morgan has some massive projects coming online over the next few years. It sees an opportunity for even more infrastructure investments due to rising industrial gas demand, onshore liquefied natural gas exports to Mexico, and demand from AI data centers.
Kinder Morgan was beaten down for so long that it's still cheap, even after its run-up. It sports a P/E ratio of 24.4, a forward P/E of 22, and a price-to-FCF ratio of 15.7.
With a yield of 4.1%, investors can expect a $1,000 investment in Kinder Morgan to earn about $41 this year.
The downstream play
Phillips 66 operates in the downstream part of oil and gas, and also has a midstream segment. Refining involves taking crude oil and other feedstocks and turning them into gasoline, petroleum products, aviation fuel, and more. Phillips 66 can't control the price of oil or what buyers will pay for these products, but it can make its operations as efficient as possible to maximize how long its plants are up and running and the margins it makes on refined products. It can also manage costs and the timing of its long-term investments.
Still, Phillips 66's efforts to manage costs have been far outweighed by the industry downturn. As you can see in the chart, its operating margin peaked in early 2023, followed by a rip-roaring year of rising stock prices that peaked in early 2024, and then had a brutal sell-off as margins and earnings continued to fall.
Phillips 66 and peers Valero Energy (VLO 0.97%) and Marathon Petroleum (MPC 0.47%) have seen margins and earnings plummet. Outside of refining, there's a downturn across the materials sector, expanding into commodity and specialty chemical companies, petrochemical companies, and more.
Despite the lower earnings, Phillips 66 is still an incredibly profitable company. Its dividend sits at $4.60 per share, while trailing-12-month earnings are $7.83 per share. Consensus analyst estimates call for $9.33 in 2025 earnings per share, roughly double the dividend. So Phillips 66's dividend, with its 4% yield, is affordable.
Like ConocoPhillips and Kinder Morgan, Phillips 66 isn't an expensive stock. It has a P/E of 14.8, a forward P/E of 12.4, and a price-to-FCF of 16.9.
A $1,000 investment in Phillips 66 will earn you $40 in passive income in 2025.
