Cash Cow or Dividend Trap? The Truth Behind Oil Tanker Stocks' 17% Yields

The oil tanker stocks sector has become a magnet for yield hunters, but is that 17% dividend too good to be true? Let’s cut through the hype and understand what’s really driving these stratospheric payouts.

Why Oil Tanker Stocks Pay So Much (And Why That Matters)

Oil tanker stocks operate in an inherently cyclical business. When crude prices surge, shipping demand explodes—companies need fleets to move that oil. Tanker operators then pocket massive profits and distribute the bulk of earnings to shareholders. That’s the golden goose. But when the cycle turns? Companies slash or eliminate dividends overnight. It’s not a feature; it’s the industry’s DNA.

Take Frontline plc (NYSE: PLC), a Bermuda-registered tanker company that’s been capturing investor attention. The stock has climbed 41% in three months and 74% year-to-date, with a headline dividend yield of 17.04%. In August, the company reported its highest second-quarter earnings since 2008—$210 million, or 94 cents per share. Earnings jumped 327% quarter-over-quarter, while revenue soared 71%. Yet the current dividend stands at just 80 cents, leaving room for even higher payouts if the cycle continues.

The Current Tailwind: Higher Oil Prices Drive Shipping Demand

The broader energy sector’s strength in 2023 has lifted oil tanker stocks alongside it. As energy prices rose through the year, so did tanker company fortunes. The logic is straightforward: higher crude prices drive increased demand for transportation capacity, pushing freight rates up and bolstering profitability. The Energy Select Sector SPDR Fund (NYSEARCA: XLE) reflected this rebound, and the less-visible tanker subsector rode the same wave.

Frontline’s financials show the benefits. The company boasts $719 million in cash and cash equivalents as of Q2, which management proudly branded itself a “cash machine.” With triple- and quadruple-digit earnings growth over the past five quarters—paired with double- and triple-digit revenue expansion—the company is swimming in cash.

Wall Street expects Frontline earnings of $2.77 per share in 2023, representing 74% growth versus 2022. That’s a staggering acceleration from just two years prior, when the pandemic had suppressed shipping demand.

The Competition: More Tanker Players in the Ring

Frontline isn’t alone. Industry peers like International Seaways Inc. (NYSE: INSW), Teekay Tankers Ltd. (NYSE: TNK), and Euronav NV (NYSE: EURN) are posting equally impressive growth metrics. Shipping research firm Bimco forecasted 2-3% cargo volume growth in crude tankers for 2023, accelerating to 3.5-4.5% in 2024. That expansion potential has lifted the entire sector.

Yet here’s the catch: these aren’t household names like Chevron Corp. (NYSE: CVX) or Exxon Mobil Corp. (NYSE: XOM). They operate in a gritty, utilitarian industry far removed from consumer-facing tech or energy majors. That obscurity may explain why oil tanker stocks remain overlooked by many portfolios—and precisely why yield-savvy investors keep hunting for them.

The Real Risk: Cyclicality Always Wins

So why the warning? Oil tanker stocks have a history of crushing shareholders during downturns. When oil prices collapse or demand for shipping dries up, tanker operators face brutal competition for contracts, forcing them to accept lower freight rates. Profitability evaporates fast, and so do dividends. A 17% yield that vanishes in a downturn isn’t a yield at all—it’s a return-of-capital event wrapped in false confidence.

The sector’s cyclical nature means that today’s cash machine can become tomorrow’s cash drain. Investors chasing these dividends must ask themselves: Can I afford to see this income cut by 50%, 75%, or completely eliminated? If the answer is no, these oil tanker stocks might be better left on the sidelines, regardless of their current attractiveness.

The opportunity is real, but so is the risk. Know which cycle you’re entering before you buy.