Sandridge Energy

Photo: SandRidge Energy 

John D. Rockefeller once said that the only thing that gave him pleasure was to see his dividends coming into his accounts. There's a lot of investors that feel the same way, which is why income stocks like SandRidge Mississippian Trust II (NYSE:SDR) are so popular with investors. There is another reason for this and that's the fact that for the most part income-paying stocks vastly outperform nonpayers. So, does that mean that SandRidge Energy (NYSE:SD) investors like myself are making a mistake by investing in a nondividend payer? Not necessarily and here's why.

Not all dividends are equal
It's easy to be drawn to income trusts like SandRidge Mississippian Trust II or its close peer, SandRidge Mississippian Trust I (NYSE:SDT). The current dividend yield for SandRidge Mississippian Trust I is 25.38% while SandRidge Mississippian Trust II currently yields 27.21%. But these are not like a normal dividend paying stock as the payments fluctuate. Further, as the following charts show the actual distributions of the Trusts have routinely been well under the targeted distribution amount.

Announcement Date

Record Date

Payable Date

Targeted Distribution

Actual Distribution Per Unit

7/22/2011

8/15/2011

8/30/2011

$1.01

$1.07

10/28/2011

11/15/2011

11/30/2011

$0.67

$0.82

2/2/2012

2/14/2012

2/29/2012

$0.63

$0.79

4/30/2012

5/15/2012

5/30/2012

$0.65

$0.79

7/26/2012

8/14/2012

8/29/2012

$0.70

$0.73

11/1/2012

11/14/2012

11/29/2012

$0.74

$0.68

1/31/2013

2/14/2013

3/1/2013

$0.73

$0.65

4/25/2013

5/15/2013

5/30/2013

$0.74

$0.59

7/25/2013

8/14/2013

8/29/2013

$0.76

$0.61

10/24/2013

11/14/2013

11/29/2013

$0.77

$0.60

Source: SandRidge Mississippian Trust I Distribution History

Announcement Date

Record Date

Payable Date

Targeted Distribution

Actual Distribution Per Unit

4/30/2012

5/15/2012

5/30/2012

$0.26

$0.27

7/26/2012

8/14/2012

8/29/2012

$0.46

$0.50

11/1/2012

11/14/2012

11/29/2012

$0.56

$0.60

1/31/2013

2/14/2013

3/1/2013

$0.60

$0.53

4/25/2013

5/15/2013

5/30/2013

$0.65

$0.56

7/25/2013

8/14/2013

8/29/2013

$0.69

$0.68

10/24/2013

11/14/2013

11/29/2013

$0.67

$0.54

SandRidge Mississippian Trust II Distribution History

The reason these payouts fluctuate is because SandRidge Mississippian Trust I and Trust II own royalty interests in oil and gas properties in the Mississippian formation of Oklahoma and Kansas. Unlike a corporation, or even an MLP, the underlying assets can't grow in order to increase the payouts. Worse yet, once these assets deplete the income will also dry up. That lack of growth is a real risk, because once SandRidge Energy drills the last well as part of the trust the income stream will be in a state of constant decline along with the oil and gas production. The only factor that could cause the income to increase is a rise in commodity prices.

In the case of SandRidge Mississippian Trust II its Area of Mutual Interest (see map below) with SandRidge Energy consists of about 53,000 net acres. SandRidge Energy's plan is to complete all the wells by the end of next year, even though it has until the end of 2016 to complete the wells. Once those wells are complete there's no hope of growth left for Trust investors.

Sandridge Mississippian Trust Ii Map

Source: SandRidge Energy 

Why SandRidge Energy is a much better buy
While SandRidge Energy doesn't currently pay any dividends it's a much better buy than either Trust. One of the reasons is quite simple, SandRidge Energy created these two trusts to fund its own growth. That should be reason alone to buy it over either trust. However, the other reasons why SandRidge Energy wins out is the simple fact that it can grow its income over time instead of seeing it being in a steady state of decline.

For example, SandRidge Energy's current plan has it projecting to grow production by 20%-25% annually through 2016. In order to meet that goal the company will spend an average of $1.55 billion in each of the next few years, again something trusts can't do. This capital will be more than enough to offset what's projected to be base declines of 35% this year, 20% in 2015, and 15% in 2016.

Investor takeaway
SandRidge Energy created the Mississippian Trusts for one real purpose and that's to provide SandRidge with additional capital to fund its growth. That reason, when combined with the fact that income from both trusts will decline along with production, makes SandRidge Energy the clear winner and a much better buy for long-term investors. 

Matt DiLallo owns shares of SandRidge Energy. The Motley Fool has no position in any of the stocks mentioned. 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.