Domestic crude prices surged 5% last week, climbing to a high of almost three years, re-cementing energy’s status as the best-performing sector in the S&P 500 this year.

Add a dash of momentum to the energy sector with the Invesco DWA Energy Momentum ETF (PXI) and things get really interesting. PXI, which tracks the the Dorsey Wright® Energy Technical Leaders Index, surged 11.17% last week, extending its year-to-date gain to 73.11%. The S&P Energy Select Sector Index is up “just” 47.1% this year.

Obviously, rising demand for crude oil sets the table for higher prices, but these days, investors are demanding more from energy companies. After last year’s coronavirus bear market for oil and as renewable energy encroaches on territory previously dominated by fossil fuels, investors are clamoring for traditional energy companies to operate more efficiently and reward shareholders’ faith with more dividends and share repurchases.

As a momentum-based strategy and one with a 12-month distribution rate of just 0.70%, according to issuer data, PXI doesn’t exactly scream “income idea.” However, a deeper examination reveals PXI has some credibility as a play on oil companies restoring payouts.

PXI 1 Year Performance

PXI’s Payout Potential

“Barclays analyst Jeanine Wai thinks that a major driver in the coming months will be announcements of new dividends or dividend policies. She also thinks that stocks that are more dependent on high oil prices could outperform,” reports Avi Salzman for Barron’s.

One of the PXI components the Barclays analyst likes as a dividend growth idea is Ovintiv (OVV), shares of which more than doubled over the past year. The company’s primary properties are shale plays in West Texas and Oklahoma and oil sands plays in Canada. Ovintiv yields just 1.23% as of June 4, indicating there’s room for the dividend to grow.

Another PXI holding Wai speaks highly of is Occidental Petroleum (OXY). While “some other investors have steered clear of because of its high debt load following its acquisition of Anadarko Petroleum…Wai likes Occidental because it is sensitive to oil prices and could do well as the commodity rises,” according to Barron’s.

Her preferred pick in the oil patch is ConocoPhillips (COP). Ovintiv, ConocoPhillips, and Occidental Petroleum combine for over 9% of PXI’s roster. ConocoPhillips has the highest dividend yield of that trio at 2.87% while Occidental yields a scant 0.14% following a significant payout cut last year due to the coronavirus pandemic’s impact on oil prices.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.