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2 Major Oil and Gas Dividends to Buy and 1 to Avoid

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Investing in oil over the past decade has been like throwing a dart at a dartboard while intoxicated. You’re bound to score at some point, but the results can be pretty erratic. Oil is a highly demanded, finite commodity that has the ability to cripple growth when it trades above $100. But it also has the power to help generate growth, a point which investors often overlook.

Often disliked for the negative effects oil has on the environment, major oil and gas companies are responsible for employing tens of thousands of employees directly and creating countless downstream jobs once the oil leaves their refineries. ExxonMobil (NYSE: XOM  ) , the poster child for the oil and gas sector and the largest company in the world by market value, employs more than 83,000 people and generated $383 billion in revenue just last year.

With so much cash flowing into the oil and gas industry, it’s not surprising to find some of the most stable and high-yielding dividends in existence parked in this sector. Let’s take a closer look at two major oil and gas companies that could provide stable but growing dividend income to your portfolio, while also highlighting one high yielder that you may want to pass on.

Chevron (NYSE: CVX  ) -- trust it
Rather than go with the largest company in the world, I decided on Chevron and its “paltry” $199 billion in revenue last year. Relative to ExxonMobil, Chevron boasts a faster near-term and long-term growth rate, as well as a lower forward earnings multiple, a higher dividend yield, and a stronger net cash position.

Pardon the pun, but what has been fueling Chevron’s growth is higher crude oil and natural gas price realizations. Beyond the 46% jump in the average selling price of oil from the year-ago period, Chevron also repurchased $1 billion worth of its stock during the quarter. Important to Chevron’s long-term success is its ability to regain permits to drill in the Gulf of Mexico, as well as increase its acreage owned in the valuable Marcellus shale region of the Eastern U.S. During the most recent quarter, Chevron made progress on both fronts. With natural gas expected to play an increasingly important role in energy generation in the coming decades, Chevron’s Marcellus acreage could prove invaluable.

Currently trading at only seven times forward earnings and yielding north of 3%, Chevron is already tipping the scales as a potential value play. Even more impressive, the company has grown its dividend at 9% annually since 2001. With a payout ratio of 26%, it seems very likely that this dividend aristocrat will be rewarding investors for years to come.

ConocoPhillips (NYSE: COP  ) -- trust it
This isn’t the first time I’ve highlighted Conoco in the oil and gas sector, and I can almost guarantee you it won’t be the last. I was torn between Conoco and BP (NYSE: BP  ) , with its 4.6% dividend yield for the final spot among trusted dividend companies in the sector, but Conoco’s plan to split its oil and exploration business from its refining business next year was the driving factor in my selection.

The company announced in July that it plans to increase shareholder value by splitting its highly volatile refining segment from the dividend-seekers paradise section of its business -- the oil and gas exploration segment. In its latest quarterly filing, the company announced that its primary goal for the exploration segment will be moderate output growth and high-yield dividends. With a payout ratio of 30% and a current yield of 4%, Conoco has grown its dividend by an average rate of 13.9% over the past 10 years. As a current dividend champion, it appears very likely that the company’s dividend will be heading higher in the not-so-distant future.

Eni (NYSE: E  ) -- avoid it
I’m not purposely trying to pick on Europe, but a basket of macroeconomic and political problems could derail Eni for longer than just the next few quarters.

As the largest oil producer in Italy, Eni has been struggling with political problems in Libya for most of the year. Prior to the power struggle between Muammar Gaddafi and rebel forces, Eni was averaging 280,000 barrels of oil production per day. In addition, 12% of all natural gas used in Italy comes from Libya. Even with the political crisis shifting in favor of rebel forces and the end in sight, it will take upward of 18 months before Eni’s operations are fully back online.

Even more concerning are the macroeconomic worries swirling around Europe regarding the sovereign debt crisis. In what could be a self-fulfilling prophecy, wide-stretching austerity packages enacted by several European countries (including Italy) could push the region into a deep recession. While oil will always remain in demand, companies already weakened by external factors, like Eni, could be in line for a significant drop-off in earnings and revenue. My advice would be not to let Eni’s 5.6% dividend cloud your better judgment and instead to heed the company’s warning that production is going to fall short of previous estimates.

Foolish roundup
Once again we’re shown that the highest yield is not always the highest-quality yield. Dividend growth and a solid long-term outlook are the keys to successful dividend hunting. Chevron and Conoco both offer sustainable long-term growth and have put shareholders first for decades. Eni, on the other hand, appears just to be going along for the ride as Europe sinks deeper into the abyss.

What’s your favorite oil and gas stock for the long term? Share your thoughts in the comments section below and consider adding Chevron, ConocoPhillips, and Eni to your watchlist.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLongMotley Fool newsletter services have recommended buying shares of Chevron. 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 that’s gushing with transparency.

Read/Post Comments (1) | Recommend This Article (6)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 06, 2011, at 8:47 PM, Veritas1010 wrote:

    Sean, I read your article with considerable interest and agree with 2-out-of-3 of your judgments as outlined, (though with Exxon [XOM] the price of security is between 2-3% dividends, not including a long consistent track record of increases).

    Firstly, let's look at Europe briefly. Everyone at the moment would concur that the European debt crisis is even weighing down the tepid and weak US economy at the moment. However investing is looking at fundamentals, debt, growth - (what markets, where, emerging or mature), pay out ratios of dividends, management, corporate history, its ethics and development philosophy.

    Lastly, do they have a product the market needs unequivocally, and are they truly international so that they serve markets not as widely affected by the global slowdown, (example: South America, Africa, Asian subcontinent).

    Secondly,if you look closely ENI is one of the strongest international oil companies in the world. Arguably in Europe this places them behind Royal Dutch Shell (RDS-A, RDS-B), TOTAL (TOT) and BP, not bad company if judged by market capitalization alone. But, with a lot more growth potential and better management than BP and, possibly, Shell also.

    All of Europe is on sale now in the energy sectors that means, ENI, TOT and Norway's Statoil (STO) are all selling low - and probabily going lower still. This applies to the Telcom sector too. How about VOD, TEF, and France Telecom (FTE)? All these world class telephone companies are selling at near yearly lows - and as for dividends - try 5-10% with long-term growth potential in international markets that our fine dividend paying US telco's can't match, either AT&T (T) or Verizon (VZ).

    (Also, keep in mind VOD owns 45% of VZ Wireless and is paying a handsome special dividend to shareholders in Feb. 2012).

    This is the contrarians' clarion call to making money as a long term investor! Don't write off ENI or Europe right now, this is the time to buy!!!

    disclaimer: I am long on ENI, STO, VOD, TEF, FTE, T, VZ, XOM, COP.

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