Grab Fat Dividends With Seadrill or Ensco

Does a 10% yield interest you? Thought so.

Jul 7, 2014 at 6:38PM

Sdrl
Source: Seadrill.

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some oil-services companies to your portfolio but don't have the time or expertise to hand-pick a few, the Market Vectors Oil Services ETF (NYSEMKT:OIH) could save you a lot of trouble. Instead of trying to figure out which stocks will perform best, you can use this exchange-traded fund to invest in many oil-services companies simultaneously.

Why this ETF, and why oil services?
Companies that do a lot of exploration can be intriguing for those looking to invest in the energy industry. But they don't always strike oil. Consider instead the companies that provide equipment and services for those explorers. They tend to be less well known than the ExxonMobils and Chevrons of the world, but many have been better long-term investments. With shale oil, fracking, and offshore drilling growing more important to the industry, demand for services is likely to continue rising over the long run.

ETFs often sport lower expense ratios than their mutual fund cousins, and this asset-laden fund charges just 0.35% annually. It's a newish ETF that slightly lagged the world market in 2013 but has trounced it this year.

A look at some components
Seadrill (NYSE:SDRL) and Ensco (NYSE:ESV) are among the roughly 25 oil-services companies in this ETF.

Seadrill
Seadrill will have many investors drooling at its 10% dividend yield. It's a compelling investment opportunity in some ways, but there's reason to worry, too. The lessor of offshore drilling rigs faces falling prices due to a growing supply of rigs on the market, but a relatively young fleet gives Seadrill an edge. For example, it recently inked a $1.1 billion, five-year deal charging $600,000 per day for a new rig. Seadrill is poised to do well over the long term thanks to the boom in deepwater drilling, which is expected by some to contribute 15% of our daily oil supply by 2030. For instance, more than 600 million barrels of recoverable oil have recently been discovered off the coast of Canada.

Seadrill carries a lot of debt, but it has solid operating cash flow and has been using low-cost debt to invest in new rigs and other means of future growth. It is responding to the growing supply of rigs on the market by suspending future building plans for now, not including the 19 rigs it has under construction. The company's last quarter was surprisingly good, topping estimates and also including a small dividend increase. With a forward P/E ratio near 11, Seadrill stock is appealing, and its dividend is a thick layer of icing on the cake. Still, a lot depends on how well its dayrates hold up and how much of its capacity is used -- and it does have a lot of debt to repay.

Ensco
Ensco, another operator of offshore drilling equipment, offers a plump 5.4% dividend yield. Its payout has tripled over the past five years, and still has room to grow. Some see the company, along with Seadrill, as the "best of breed" in its industry, liking its relatively low debt, young fleet, and generally high profit margins. On the other hand, its fleet use rate is lower than Seadrill's and not stellar in the industry, either.

Like Seadrill, Ensco is challenged by a rising supply of rigs in the market, which is pressuring dayrates. But also like Seadrill, Ensco recently secured a big five-year contract with French oil titan Total at higher-than-expected prices (starting around $610,000 per day). My colleague Rupert Hargreaves has pointed out that the fat contract could still be renegotiated or canceled, as others have been recently.

Ensco's stock sports a current and forward P/E ratio of about nine, well below its five-year average of 11.5, suggesting that the company is attractively priced. It's well worth considering for your long-term portfolio, offering the potential for both stock-price appreciation and generous dividend income. Just remember that the industry's next few years could be bumpy.

The big picture
It makes sense to consider adding some oil-services companies to your portfolio. You can do so easily via an ETF. Alternatively, you might simply investigate its holdings and then cherry-pick from among them after doing some research on your own.

Here's another way to profit from oil
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, owns shares of Seadrill. The Motley Fool recommends Chevron, Seadrill, and Total (ADR). The Motley Fool owns shares of Seadrill. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers