Better Dividend Stock: Occidental Petroleum vs. Energy Transfer

Occidental Petroleum (NYSE: OXY) and Energy Transfer (NYSE: ET) are popular income stocks for energy-focused investors. Occidental, also known as Oxy, is a leading oil and gas producer. Energy Transfer is a major midstream pipeline operator.

Occidental pays a forward yield of 2.4%. It cut its dividend during the pandemic in 2020 and kept it unchanged in 2021, but it's raised its payout annually over the following four years. Energy Transfer pays a higher forward yield of 8.3%, and it has raised its distributions for 12 consecutive years.

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Over the past three years, Oxy's stock declined 40% as Energy Transfer's stock rallied over 40%. Let's see why Energy Transfer outperformed Oxy -- and if it's still the better buy today.

Image source: Getty Images.

The differences between Oxy and Energy Transfer

Oxy and Energy Transfer operate different business models.

Oxy is primarily an upstream company that engages in the exploration, drilling, and extraction of oil and natural gas. When oil and gas prices rise, its revenue growth outpaces its spending and its margins expand. But when those prices decline, its revenue growth slows down and its margins contract.

Energy Transfer is a midstream company that only provides pipeline, storage, and terminal services for natural gas, crude oil, and other refined products. It operates over 125,000 miles of pipelines across 44 states, and it runs a "toll road" business by charging upstream and downstream companies to use its infrastructure.

Therefore, Energy Transfer doesn't need to worry about volatile oil and gas prices; it keeps generating stable revenue and profits as long as its pipelines are up and running.

Over the past three years, the spot price of West Texas Intermediate (WTI) crude oil has declined about 46%. That drop was caused by inflation and high interest rates (which cooled the global economy and the market's demand for oil), and a decision by OPEC+ to boost its output. The rising U.S. dollar exacerbated that pressure.

That oil market's slowdown crushed Oxy's stock, but it barely affected Energy Transfer. Moreover, Oxy's dividend cut in 2020 made it a lot less attractive to income investors, especially as rising interest rates significantly boosted the yields of risk-free CDs and T-bills. Meanwhile, Energy Transfer's higher distribution still made it an attractive income investment.

How sustainable are their dividends and distributions?

In 2024, Oxy paid out $0.88 per share in dividends. Those payments were easily covered by its earnings per share (EPS) of $2.44, but that still marked a 37% drop from its EPS of $3.90 in 2023. Its $1.45 billion in cash dividends accounted for only 30% of its free cash flow (FCF) of $4.9 billion for the year, so it still has room to raise its payout even if crude prices stay low.

Analysts expect Oxy's EPS to rise 16% to $2.83 this year, which should easily cover its forward annual dividend rate of $0.96, but that outlook assumes that crude oil prices will stabilize and the company can continue to expand its smaller midstream, marketing, and chemical businesses.

Without any meaningful trade deals or tariff cuts, we really shouldn't put too much faith in those estimates. Oxy's stock seems cheap at 14 times this year's earnings, but it might deserve that lower valuation.

Energy Transfer is a master limited partnership (MLP), which blends the tax advantages of a private partnership with the liquidity of a publicly traded stock. MLPs report their profits as earnings per unit (EPU) instead of EPS, and they pay distributions -- which are usually more tax efficient than dividends because they're classified as a return of capital instead of income.

Energy Transfer, like most MLPs, aims to pay out most of its EPU as distributions. In 2024, it generated an EPU of $1.28, slightly lower than its distributions of $1.285 per unit. But for 2025, analysts expect its EPU to rise 16% to $1.48 -- which easily covers its annual distribution rate of $1.31.

That forecast should be more reliable than Oxy's, since Energy Transfer isn't as exposed to the volatile crude prices and other macro headwinds. It also looks cheaper at just 10 times this year's estimated EPU.

The better buy: Energy Transfer

It's obvious why Energy Transfer outperformed Oxy over the past three years. It should also remain the better buy for the foreseeable future for three simple reasons: It's not shackled to crude oil prices, it pays a higher distribution, and it's fundamentally cheaper. Oxy might eventually bounce back, but its cyclical downturn isn't over yet.

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Leo Sun has positions in Energy Transfer. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.