3 Solid Dividend Stocks in Energy
May 13th 2013 2:00PM
Updated May 13th 2013 3:05PM
In today's low-yield environment investors are scrambling to make up the paltry income found in bonds and are increasingly looking to higher-yielding stocks. In some cases investors are taking on too much risk for the reward of a few extra dollars of income. However, in the case of these three stocks to follow, investors can get their desired income by investing in companies with a secure future. That's why these three stocks are some the best dividend payers in the energy sector today.
BreitBurn Energy Partners
The oil and gas producer is structured like an MLP that most income investors have become well acquainted with these days. The only difference here is that BreitBurn produces oil and gas instead of transporting or storing it. That business model and structure has enabled the company to pay a very generous 10% distribution. Further, it strives to deliver best-in-class distribution growth which it recently delivered when it boosted the distribution by 4%.
BreitBurn's most recent quarter was a little light, but the company is investing heavily in high-margin oil projects which, when combined with its acquisition opportunities, has the company seeing brighter days ahead. Further, when you add up BreitBurn's solid reserves, which you can see in the chart below, you can see why the company should continue to produce for years to come:
These are just some of the reasons that make BreitBurn one of the best dividend stocks in the upstream MLP space. As with all stocks there are risks with it, so investors do need to keep an eye on commodity prices. While it's well-hedged, it still lags its peers in that regard, which could actually work out well if oil and gas prices head higher. The key, though, is that its distribution is very safe and likely will keep going higher.
Sticking with the MLP theme, Hi-Crush Partners operates at the other end of the oil and gas drilling spectrum. The company mines the sand that's used as a fracking proppant; in so doing, it's one of the many companies piggybacking on the shale boom. As one of the lowest-cost producers, the company enjoys healthy margins which enables it to pay a very fine 10.5% distribution.
Because of that payout and the company's solid growth prospects, I'm personally looking to add units to my portfolio. I also like the fact that this company is a pure play in pure frack sand, which is why I prefer it to U.S Silica . That being said, being a pure play adds to the risks: Lack of diversification is the chief risk. The difference here is that U.S. Silica has over 200 products and 1,400 customers while Hi-Crush has just one product and a handful of customers. Still, those customers are secured by long-term contracts, which is why Hi-Crush is one of the best dividend stocks out there these days.
With a dividend of just over 8.5% you'd think that Seadrill was an MLP, but it's not. In fact, its dividend is actually a lot higher than the distribution of its publicly traded MLP arm, Seadrill Partners . Because of that higher payout and its growth opportunities, Seadrill is the best dividend stock of the two.
Like Hi-Crush, I'm personally adding this one to my yield-hungry portfolio. The company has an enviable contract backlog and its building out one of the newest fleets in the industry. While it has a hefty debt load, the company's backlog and projected EBITDA growth will go a long way to securing its future. Further, it can drop down assets to Seadrill Partners if it needs the cash.
Foolish bottom line
The energy industry is one of the best places to look for income in this yield-starved market. These three companies are among the best dividend stocks in my opinion. All provide revenue that's secured for the next several years by contracts, which should go a long way in keeping those payouts coming.
If I had to pick a favorite of the three I'd probably consider one of the more exciting plays in the space: Seadrill. If you'd like to learn more about this top dividend stock, one of The Motley Fool's top Stock Advisor analysts has authored a premium research report on the company, covering everything from its strengths and weaknesses to what to expect going forward. Simply click here now to claim your copy and determine whether Seadrill deserves a place in your portfolio.
The article 3 Solid Dividend Stocks in Energy originally appeared on Fool.com.Motley Fool contributor Matt DiLallo has the following options: Short Jul 2013 $35 Puts on Seadrill and Short Jul 2013 $17.5 Puts on HI-CRUSH PARTNERS LP UNIT LTD PARTNER INTS. The Motley Fool recommends BreitBurn Energy Partners L.P. and Seadrill. The Motley Fool owns shares of HI-CRUSH PARTNERS LP UNIT LTD PARTNER INTS, Seadrill, and U S SILICA HLDGS INC COM USD0.01. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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