4 Promising Dividend Stocks in Oil and Gas

The markets have been volatile for quite some time, and no one really knows when this madness will end. Oil prices have been fluctuating wildly. On one side, the European debt crisis threatens to pull down world economies even further, while on the other side threats to Middle East crude oil may cause an unprecedented rise in oil prices.

Investors are caught in between, especially when it comes to oil stocks. On one end of the spectrum, oil companies are taking advantage of rising energy prices and, hence, increasing production, while on the other end, a rerun of last August's bear market is capable of unnerving even savvy investors. In short, the unpredictability is too big a factor to ignore.

The way out
So where does an investor stand who wants to invest in oil without taking too many risks? The answer lies in dividend stocks.

A steady stream of income is a time-tested way of getting the better of volatility in the markets and uncertainty in returns. Here are four dividend stocks you should be looking into and that I believe should help you beat the markets in the long run:

Seadrill (NYSE: SDRL  ) : There's no denying that oil-field services are going to witness a substantial surge in business with increased exploration and production activity anticipated in the next few years. The buzzword here is offshore drilling. Easy and conventional sources of oil are fast disappearing and E&P companies are racing to make discoveries in the deep sea across the globe.

Global offshore drilling is steadily gathering steam with the African, Australian, and Asian markets leading the way. According to analysts, the offshore rig demand is estimated to increase by 12%-19% in two years. This is where offshore driller Seadrill is a runaway winner. Fellow Fool Travis Hoium also argues that this driller's focus on deepwater has it positioned better to create value in the long term. A growing demand for the company's drilling units has seen available rigs fall substantially, and this trend should continue in the future.

This company has already been generating healthy returns, and now with a dividend yield of 9%, this has been among the most generous in the oil services industry. A sound business and a very good dividend yield. In short, a value stock.

Cheniere Energy Partners (AMEX: CQP  ) : Natural gas is the next biggest thing in the energy sector. But this commodity needs to be transported and stored. This master limited partnership's earnings have been in the red for quite some time. But that shouldn't be too worrying. By nature, the MLP structure is prevalent in industries whose assets generate stable cash flows but are pretty slow moving in terms of growth. An ideal example is that of energy transportation and storage. But the primary advantages MLPs enjoy are tax benefits, which are immense.

Since they are not taxed at the corporate level, MLPs can afford to gain access and operate premium assets, which integrated oil companies find costlier. And that's where Cheniere comes in. Along with its parent company, Cheniere Energy (AMEX: LNG  ) , it has clinched a deal with the BG Group to export 3.5 million tons of liquefied natural gas. The mouthwatering 10.5% dividend yield now looks too good to resist.

Enerplus (NYSE: ERF  ) : This Canadian independent oil and gas producer operates in some of the most lucrative prospects in the oil industry. The Western Canada oil sands, the Bakken shale play in North Dakota, and the Marcellus shale play all hold reserves that contribute to a very strong asset base.

The company successfully transitioned itself and took a more growth-oriented approach that should see big returns in the future. Production has been steadily increasing and has been encouraging so far. With a dividend yield of 8.3%, investors should definitely have a look at this safe stock.

Penn West Petroleum (NYSE: PWE  ) : This Canadian upstream has been a perennial favorite of mine. With a current dividend yield of 5.6%, the numbers speak for themselves. This income-trust-to-corporation convert has effectively turned around a $64 million loss into a $138 million profit in the third quarter. Increased focus on oil and liquids production has paid off. That's not too surprising given the company's operations. The Western Canadian Sedimentary Basin has been a traditional hunting ground for upstream companies, and Penn West looks fully capable of exploiting its reserves.

Foolish bottom line
While these stocks are among the best dividend payers in the oil and gas industry, one's search shouldn't end here. But dividend payers definitely counteract the risk when compared to nondividend stocks. However, if you're looking for more ideas, The Motley Fool has created a new special oil report titled "3 Stocks for $100 Oil," which you can download today, absolutely free. In this report, Fool analysts cover three outstanding oil companies. To get instant access to the names of the three oil stocks, click here -- it's free.

Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. 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.


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  • Report this Comment On December 21, 2011, at 2:25 PM, RMHon wrote:

    With all due respect (I've been a MF fan for 15 years), I think this whole line is a terrible suggestion. As I understand it, the MF, like Warren Buffett, and anyone investing for the purposes of dividends, should be investing for the long term. Correct?

    Oil stocks look great today but that is highly unlikely to continue. Within 5 years solar is going to be at grid parity with coal. Five years beyond that solar is going to be cheaper than even wholesale electricity. Wind energy is also falling in price. All fossil fuel sources of energy are rising in price. In the next 10 years automobile batteries for EV's are supposed to improve in efficiency by 3-5X, and as production ramps up EV batteries costs are projected to fall by a factor of 10.

    Quite literally, the very foundations of these companies is crumbling. If you're an investor for the long haul oil industry stocks are terrible investments.

  • Report this Comment On December 21, 2011, at 2:32 PM, bricks79 wrote:

    Even if solar and wind increase efficiency by tenfold, they will be a small part of energy production. Oil and gas will be around for the next 20-30 years according to a wide variety of energy experts.

  • Report this Comment On December 25, 2011, at 9:43 AM, diditbad100 wrote:

    I am convinced that nat gas will be the replacement for oil, many trucking companies are already converting. The solar and wind industries will be laggards due to the fact that nat gas is plentiful.

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