The market debate over the traditional energy sector continues, and the main focus is that energy stocks are invested only for their high dividend yield, but is the high dividend payout sustainable?

Freedom Day Solutions CEO, an asset manager, says the debate over investing in energy stocks is so one-sided that simple clues to dividends have been ignored. On the contrary, people pay more attention to when traditional energy companies will disappear.

Ryan Krueger said the dividend provided investors with better conclusive evidence than any group of people. As a professional portfolio manager since 1996, he has studied every possible factor for investment success and found no other indicators with such a long history. The payment of dividends is unaffected by opinions, which is even more important when confusion about energy stocks reaches an all-time high. The potential for energy stocks to pay and increase dividends has never been so great, in large part because so many people think the industry is uninvestable, which is a significant paradox.

Start with simple supply and demand. Since 1946, a large number of votes, regulations and protests to end fossil fuels have led to a sharp drop in spending in the oil and gas industry in the last decade. However, the number of global households has more than tripled since 1946, and demand of all kinds has increased, which in turn requires more oil to produce. Between now and 2050, when the United Nations net zero carbon emissions target is met, the demand for traditional energy will not only support dividends with more free cash flow, but also significantly increase future dividends.

The data show that oil and gas companies have no problem finding capital. In the past, because of greed in pursuit of higher prices, energy was so reckless in issuing stocks and debt that some companies went bankrupt. Speculative investors have poured money into shale projects that never generate cash flow or destroy capital. Some of the highest-quality energy producers have formally linked their interests to stakeholders, showing their mathematical models based on dividend forecasts and using a commodity price hypothesis that is not greedy at all.

Investors have ignored the huge shift in mindset that has taken place since the last time oil and gas prices were so high. One of many companies has learned to use more conservative financial planning from boom and bust cycles.

Unlike previous cycles, the balance sheets of some energy producers are still primitive; net long-term debt has been reduced or eliminated. Coupled with raising the threshold for internal investment before considering new projects, stakeholders directly benefit.

For energy companies, free cash flow is the test, says Ryan Krueger. And the cash flow of these companies is improving, supporting more dividends and less speculation. Even better, because of the pressure to sell, energy companies can buy it at a lower price than the entire market.

The current policy of the United States is also hindering the development of traditional energy, so energy companies can only reward shareholders through dividends.

The pipeline project most likely to increase capacity, proposed in 2008, was finally abandoned in 2021, when it was fully supported by long-term contracts from Canadian producers. Hinds Howard, an energy pipeline expert, says another project will strive to be completed after three years of approval. The initial cost estimate almost doubled, as a result of legal work around additional regulatory delays.

In terms of refining, refineries are not only facing years of no growth and regulatory delays, but are also being eliminated. In the past three years alone, four refineries have closed and two have partially closed. There are now 129 refineries in the United States, compared with 250 in 1982. For investors, the unique opportunity in history is that the surviving operators, after many rounds of elimination, have received safer energy dividends than ever before.

Finally, Ryan Krueger says, traditional energy sources have become cleaner and more efficient. The number of kilograms of carbon emissions per dollar of GDP in the United States has more than halved since 1990. This is not a solution, but it is the right direction. Innovation is more effective than regulation. American energy companies already have the best climate technology in the world. Traditional energy companies play a huge role in a more sustainable future, so they have enough ability to continue to pay generous dividends to investors.