5 Energy Investments for Big Dividend Income
Christopher is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Many of the high-yield stocks trading on the U.S. exchanges hail from of the energy sector. There are several reasons income investors find attractive prospects among the energy stocks. Many energy E&P and transport companies are organized as publicly traded limited partnerships, which means they must pay out the bulk of earnings as distributions to share/unit holders. Another group of energy stocks are foreign companies, which may have a tradition of higher dividend payouts. Finally, some U.S. energy companies organized as corporations pay attractive dividends, making them growth and income type of investments. Here are five big dividend energy companies with representatives from each group.
Magellan Midstream Partners, L.P. (NYSE: MMP) Current yields 4.7 percent. Magellan Midstream owns almost 10,000 miles of pipeline and 50 terminals that handle the transport of refined petroleum products such as gasoline, diesel, jet and heating fuel. The MMP distribution has been increased every quarter since the company IPO in 2001. Over the 10 year period the distribution rate has tripled. With the last four distributions the quarterly rate has increased from 74.5 cents to 80 cents per share – a 7.4 percent increase.
TransCanada Corp. (NYSE: TRP) Current yields 3.9 percent. TransCanada is an energy sector company that builds and manages oil and gas pipelines in the U.S. and Canada. The company also builds and owns electric generation plants. TransCanada is the company behind the hot news item concerning building the Keystone XL pipeline from Canada to the U.S. gulf coast. The company has increased its dividend rate each year going back at least 10 years. In recent years the quarterly rate has been increased by 2 cents with the announcement of the first quarter earnings and dividend. If TransCanada increases the dividend in 2012 to 44 cents quarterly, the current yield would be just over 5 percent.
Spectra Energy Corp. (NYSE: SE) Current yields 3.5 percent. Spectra Energy provides natural gas gathering and processing, transmission, storage, and distribution services. The company is headquartered in Houston, Texas, but provides its range of natural gas services across Canada as well as in the U.S. As a $20 billion market cap company, Spectra is a serious player in the natural gas industry. The company maintained a 25 cent quarterly dividend from mid 2008 through the end of 2010. In 2011, the dividend was increased to 26 cents then again to 28 cents in the fourth quarter. Do not confuse this stock with Spectra Energy Partners (SEP), a limited partnership managed by Spectra Energy.
Holly Energy Partners, L.P. (NYSE: HEP) Current yields 6.5 percent. Holly Energy Partners is a small cap – $1.2 billion value – company that owns and operates crude oil and petroleum product pipelines in the southwestern part of the U.S. The company's distribution policy is to pay out all of the cash on hand each quarter. That policy has worked out to the dividend increasing by one cent almost every quarter – for some quarters the increase was a little larger. Just announced is that the 2012 first quarter distribution will be 88.5 cents compared to 87.5 cents for the previous distribution. Holly Energy Partners is managed by HollyFrontier Corp. (NYSE: HFC).
Plains All American Pipeline, L.P. (NYSE: PAA) Current yields 5.3 percent. Plains All American Pipeline conducts the pipeline transportation and storage of crude oil, refined petroleum products and liquid natural gas – LNG. This is another limited partnerships company with a history if increasing the distribution rate every quarter. In early January the first quarter distribution was announced at a rate of $1.025. This represents a 7 percent increase compared to the amount paid for the 2011 first quarter. Plains All American is also the managing partner for PAA Natural Gas Storage, L.P. (NYSE: PNG).
Investors should note that energy companies formed as limited partnerships do not pay dividends in the corporate sense. Distributions are reported on a K-1 form, which is used to compile the investor's income tax return. One advantage of K-1 type distributions is a significant portion of the payout may be classified as a non-taxable return of capital. Investors should check the individual company's website or K-1 for the current tax status of distributions.
Motley Fool newsletter services recommend Magellan Midstream Partners, L.P., Spectra Energy and TransCanada. The Motley Fool has no positions in the stocks mentioned above. DividendKings has no positions in the stocks mentioned above. 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.