5 Great Energy Stocks with Room to Run

Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The energy sector can be unpredictably explosive but equally as cutthroat as energy companies live in a dog eat dog environment. Because the world will always need energy and continues to need more of it each year than the last, there are plenty of successful stocks that have stood out against the rest as dependable long term options for income investors, who utilize dividends to reinvest and strengthen their position as a means of compounding returns. Do the following stocks have what it takes to run the long race or are they on the verge of running out of fuel?

Pioneer Southwest Energy Partners (NYSE: PSE) has sustained its quarterly dividend of $0.51 per share for the last four quarters and provides a yield of over 7% at a payout ratio of 0.19. There is strong growth potential for this partnership that has interests in over 1,100 gas and oil wells in western Texas and southeastern New Mexico. Its profitability has grown over the last several years, posting $105 million in net revenues for all of 2010 compared to $89 million in the third quarter of 2011 alone.

I think that Pioneer Southwest Energy Partners has established enough consistency to continue to pay and increase its dividend each quarter. This makes the stock a good buy for income investors or as a hedge against other riskier ventures that you take a position in elsewhere.

EV Energy Partners (NASDAQ: EVEP) has been showing very minor increases to its dividend the past four quarters, but the increases are a sign that the company is headed in the right direction and able to maintain its dividend. Its $0.76 per share dividend has been gaining a tenth of a cent per quarter for the last three quarters and it pays out at a ratio of 0.32 with a yield near 5%. EV Energy Partners is also posting higher gains each year over three consecutive years and posted a third quarter gain of $83 million in 2011 compared to $94 million in all of 2010. I think that this is a great buy with the potential for a growing yield over time.

The success of Baytex Energy (NYSE: BTE) is evident when you look at its rocket-propelled climb from $9 per share to $58 over only three years. Like EV Energy Partners and Pioneer Southwest Energy Partners, Baytex Energy has shown increasing gains each year and its dividend is slowly rising— from $0.20 per share four quarters ago to $0.22 in its last payout. Baytex Energy dividends currently provide a yield of over 4%, but I believe that it has the potential to produce even an even greater yield in the future. I see many reasons to take a position here and consider it a solid buy.

QR Energy (NYSE: QRE) pays out at an extremely attractive yield of 9% and just increased its dividend from $0.41 per share to $0.47 in its last payout. The only concern I have is that it has only been profitable for three years, with losses in 2009 and 2010 of $8 million and $5 million. Its third quarter profit of $52 million in 2011 suggests that the company is on the right track, but I think that there is a considerable risk in any dividend stock that lacks consistency.

You may want to take a position here anyway, however, due to the fact that QR Energy is gaining momentum and the two years prior to 2011 may be behind the company now. If you do take a position here, I would just watch the stock a little more closely to be certain that I catch any signs of unreliability that would make me want to get out. I think QR Energy is a buy, but a cautious one.

Vanguard Natural Resources (NASDAQ: VNR) has raised its dividend every quarter over the past year and its stock has more than tripled over the past three years— making a move from $9 per share to $27. Its most current dividend payout was about $0.59 per share, up from $0.57 four quarters ago and it pays out at a ratio of 0.24 with at a projected yield between 8% and 9%. Its rising stock value coupled with the return on its dividend makes this a great short and long term stock and I think it is a great buy for the long term investor due to positive momentum (Vanguard Natural Resources has shown two consecutive years of profitability) and future growth potential.

Pioneer Southwest Energy Partners and Vanguard Natural Resources are my favorites here but I don’t think any of these picks are losers. Baytex Energy and EV Energy Partners both show a lot of potential to grow, but do not provide current dividends that match the returns provided by Pioneer or Vanguard. QR Energy is the most risky stock in the group, in my opinion, due to lack of consistency. Surging profits over the last year do make QR Energy very attractive to the short term investor, however, but I am not convinced that it can sustain that momentum until it shows profitability over a longer period of time.

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