This week, VOC Energy Trust (NYSE:VOC) announced a 15.6% drop in its quarterly dividend, which was bad news for investors who were looking for income.
Because of the cut, VOC’s forward dividend yield has dropped from 11.97% to 10.11%. Shareholders are getting ready for less money from the oil and gas income trust because of the news. VOC stock went down.
The next payment, on February 14, will be made to owners whose shares were on file as of January 30th at the new rate of $0.19 per share. For payout capture, the ex-date that goes with this will be the 29th.
This suddenly smaller division could change again if the price of energy or the amount being made changes.
Even though it’s bad news for shareholders, the income cut is in line with VOC Energy Trust’s royalty interests’ poor performance. The trust owns oil and gas sites mainly in Texas, Louisiana, Kansas, and New Mexico, with net profit interests in them.
Low prices for natural gas made it harder for VOC to get royalties from its stocks in the first nine months of 2023.
The warm start to winter caused US natural gas stocks to rise, which lowered Henry Hub spot prices for domestic natural gas. Sadly, more than 70% of VOC’s stocks are linked to natural gas and only 16% are linked to oil.
Before this cut, VOC Energy Trust stood out as a high-yield income play that didn’t cause a lot of trouble when looking at environmental, social, and governance (ESG) factors.
VOC had grown an attractive yield of well over 9% while giving owners regular payouts. In just the last three years, VOC’s dividends have grown at an amazing rate of 58% per year.
VOC’s Dividend Outlook Hinges on Commodity Pricing Improvement
Since VOC doesn’t have access to any other sources of income, the trust’s distributions will continue to rest a lot on changes in commodity prices. As long as the weather stays warm, there is a chance that dividends will be cut even more.
This is because natural gas store levels are still high. Seasonal demand spikes that were widely expected did not fully occur last month, which allowed inventories to rebuild.
But VOC is still in a good situation to drive a dividend rebound if supplies get tight. Concerns about high methane pollution could stop some natural gas production, which would keep the markets in balance. And a bigger economic turnaround could help keep up the demand for energy in the future.
But for now, investors who are looking for income will have to change their return plans because of this big dividend cut. Luckily, VOC has a much higher potential income than standard fixed income options like bonds, even though its yield is still above 10%.
To give you an idea, the 10-Year US Treasury Bond has a yearly yield that is less than 4% right now. Even though it’s disappointing, VOC’s lower payouts keep beating many similar assets.
In general, VOC Energy Trust’s strategy of variable dividends connects investors directly to changes in the prices of commodities, which can be good or bad. Since interest rates are going to go up even more in 2024, it’s not clear what will happen to the natural gas market balance.
As a result, income investors should prepare for more volatility from VOC while they look for better dividend yield options elsewhere.
Even so, whites are still enviably high compared to fixed income, and a yield over 10% helps pay shareholders who are willing to take on more risk.