There are two reasons why investors buy stock. These two reasons are to produce income or to earn capital gains. Unfortunately, whether or not a given stock will generate capital gains is largely at the mercy of the market, at least in the short term. Although the market has certainly delivered consistent returns since the financial crisis, there is no guarantee that this will always be the case. For evidence of this, just look at the returns delivered by the S&P 500 over the first six months of this year.
As the chart shows, until the last few weeks, the S&P 500 was flat for the year. Such disappointing returns can persist for quite some time. Thus, it is important to have income-producing assets in your portfolio in order to continue to grow your portfolio. One way that this can be accomplished is by investing in shares of dividend-paying companies such as Enerplus Corporation (NYSE:ERF).
Enerplus Corporation is a corporation that owns a portfolio of natural gas and oil-producing properties that are located in four resource-rich areas in the United States and Canada.
Unlike some other high-yield oil and gas companies such as Vanguard Natural Resources (NASDAQ:VNR) and Breitburn Energy Partners (NASDAQ:BBEP), Enerplus does not focus on acquiring mature oil and gas producing properties. Instead, Enerplus has significant undeveloped resources, and the development of these properties will serve as a driver of forward growth. Enerplus has already begun to develop these properties and expects that this development will increase Enerplus' average daily production from the fourth quarter 2013 level of 94,167 barrels of oil equivalent to 96,000-100,000 barrels of oil equivalent this year.
Marcellus production growth
One area in which Enerplus Corporation is likely to see forward production growth is in the natural gas-rich Marcellus shale region. This region is one in which Enerplus Corporation has already seen impressive growth over the past few years. Since 2010, Enerplus has managed to grow its proven and probable natural gas reserves in the Marcellus shale by 415%, reaching their current level of 601 billion cubic feet. This accounts for half of all the gas that Enerplus Corporation has in its reserves.
Enerplus has also significantly grown its production of natural gas from its position in the Marcellus shale over the past few years. Back in 2011, the company was producing 21 million cubic feet of natural gas per day from its position in the region. By 2013, Enerplus had managed to increase its production to 95 million cubic feet per day. The company will be bringing even more wells online this year, which allowed it to produce an average of 180 million cubic feet of natural gas per day in the first quarter. If Enerplus is successful then this would represent production growth of 750% over the four-year period and an average of 90% growth each year.
Enerplus could see even further production growth from this area going forward. This is due, at least partly, to the fact that the company has mapped out another 240 wells that it plans to drill over the relatively near term. This should allow it to boost its production beyond the 180 million cubic feet per day level that it achieved in the first quarter.
Sustained and growing cash flow supports dividend
This projected forward production growth will provide strong support to the company's bottom line and enable it to maintain its high dividend, which currently stands at 4.22%. This could be important when considering the suitability of Enerplus as an income investment considering that its dividends have been decreasing since 2011 when it converted to a corporation from its former status as a Canadian income trust. While this conversion accounted for some of the company's lower dividends (since it had to pay more in taxes), it cannot account for all of the reduction.
The other reason that Enerplus had to cut its dividend is that natural gas prices fell precipitously in 2011 and stayed depressed until early this year. This caused the company's cash flows to become constrained. However, now that natural gas prices have improved, Enerplus' free cash flows have begun to climb again. This should allow the company to sustain or increase its dividend, which is exactly what an income-focused investor should look for.
In conclusion, Enerplus' combination of growth and a high dividend yield could make it a valuable addition to the portfolio of any investor. The market cannot always be depended on to deliver capital gains and, during those times when it doesn't, we have to depend on dividends for returns. Enerplus can offer both growth and dividends, making it a very appealing play.
Daniel Gibbs has a long position in Vanguard Natural Resources. His research firm, Powerhedge LLC, has a business relationship with a registered investment advisor whose clients may have positions in any of the stocks mentioned. Powerhedge LLC has no position in any stocks mentioned and is not a registered investment advisor. The Motley Fool recommends BreitBurn Energy Partners. 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.