3 Big Energy Dividends to Buy, 2 to Avoid
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The constantly growing demand for energy and the emerging economies that require it provides long term security to energy stocks and makes them more stable long term investments. Reinvesting in the same company through the use of dividends provides a renewable source of fuel to grow your position in a stock and increase its returns over time through a dividend reinvestment plan. The main advantage of reinvestment plans is that it requires no additional capital to strengthen your position and it provides compounded gains over the long term. Let’s examine the following energy stocks to determine which have the strongest long term outlook and provide the best return on investment through dividends and appreciation.
Penn West Petroleum (NYSE: PWE) has remained stable over the last year with a share price staying between $20 and $25 per share and a consistent quarterly dividend of $0.27 to provide a yield of around 5%. The company is currently exploring the Western Canadian sedimentary basin in search of new reserves and has a current production of 166,000 barrels of oil equivalent per day. Penn West is almost completely split between oil and natural gas holdings with 60% of its production in oil and the rest in natural gas. I think that Penn West’s expansion into new reserves will strengthen its position and provide additional revenue to maintain the dividend, which makes this a decent buy for any income investor looking for sustainable and safe returns over the long term.
Penn Virginia (NYSE: PVA) is currently burning through its cash at losses of about $32 million per quarter and while it has continued to pay out its dividend during its slow down, I don’t believe that it will continue for much longer. Aside from the possible reduction of its $0.05 per share quarterly dividend that provides 4% yield, Penn Virginia has shown a drop in value over the last year from $17 per share to just under $5, which negates the entire purpose of reinvesting the dividend. Because this dividend would be reinvested into a free falling stock, I think that reinvestment here is the equivalent of throwing oil into an empty well and will take a pass on this one.
Martin Midstream Partners (MMLP) offers an attractive dividend of $0.76 per share that comes to a yield over 8%, but its growth has been hampered over the past few years by a rising cost of acquiring its revenue. Its cost of revenue has risen each quarter from $198 million in the last quarter of 2010 to $256 million in the third quarter of 2011. Rising costs and slow growth have me concerned that Martin Midstream Partners may need to lower its dividend and its stale growth prospects could ultimately affect its share value if the company is unable to attract revenue more efficiently. The dividend looks great but I don’t think it will be sustained, making this a stock that isn’t for me.
ECA Marcellus Trust (NYSE: ECT) has enjoyed an increase in both its revenue and its dividend each quarter with a dividend that now pays $0.63 per share to provide a yield over 11%. The trust owns interests in eight gas wells in the Marcellus shale formation and has interests in another six wells that are still undergoing completion and will provide more security and growth in the near future for the ECA Marcellus Trust. Its profits have shown a steady gain over the past four quarters from $7 million to just over $11 million in the third quarter of 2011. I think that this stock is stable and is a great buy with an 11% yield that I believe can be maintained in the coming years.
Dorchester Minerals (NASDAQ: DMLP) operates in 25 states and has interests in around 116 wells across the country and in over 573 counties. Its dividend is consistently in the range of $0.40 to $0.45 per share and provides a decent yield of around 8%. The company has been in the black for the last four years and produced an average of $10 million in profit over the last four quarters. I think that Dorchester will be able to sustain its dividend over time and that this is a solid buy for long term income investors looking for a secure and decent quarterly return on their investment.
The three winners in this group are Penn West, ECA Marcellus Trust and Dorchester Minerals because each shows access to strong assets, provides sustainable profits and pays out a very decent dividend that I believe each company will be able to provide continuously years into the future. In contrast, Penn Virginia and Martin Midstream Partners lack efficiency and the ability to grow in the near future. Penn Virginia’s dividend is ineffective due to the devaluation of its stock and while it does present the opportunity for shares to be bought while the stock is cheap, I think it will continue to fall for a while before reaching its floor. Martin Midstream Partners isn’t in any particular financial trouble, but I don’t see very much potential for growth and its profits in recent years have stagnated while its costs have inflated, which will ultimately affect its dividend.
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