Dividend payers deserve a berth in any long-term stock portfolio. But seemingly attractive dividend yields are not always as fetching as they may appear. Let's see which companies that have oil refining capacity offer the most promising dividends.

Yields and growth rates and payout ratios, oh my!
Before we get to those companies, though, you should understand just why you'd want to own dividend payers. These stocks can contribute a huge chunk of growth to your portfolio in good times, and bolster it during market downturns.

As my colleague Matt Koppenheffer has noted: "Between 2000 and 2009, the average dividend-adjusted return on stocks with market caps above $5 billion and a trailing yield of 2.5% or better was a whopping 114%. Compare that to a 19% drop for the S&P 500."

When hunting for promising dividend payers, unsophisticated investors will often just look for the highest yields they can find. While these stocks will indeed pay out the most, the yield figures apply only for the current year. Extremely steep dividend yields can be precarious, and even solid ones are vulnerable to dividend cuts.

When evaluating a company's attractiveness in terms of its dividend, it's important to examine at least three factors:

  1. The current yield
  2. The dividend growth
  3. The payout ratio

If a company has a middling dividend yield, but a history of increasing its payment substantially from year to year, it deserves extra consideration. A $3 dividend can become $7.80 in 10 years, if it grows at 10% annually. (It will top $20 after 20 years.) Thus, a 3% yield today may be more attractive than a 4% one, if the 3% company is rapidly increasing that dividend.

Next, consider the company's payout ratio, which reflects what percentage of income the company is spending on its dividend. In general, the lower the number, the better. A low payout ratio means there's plenty of room for generous dividend increases. It also means that much of the company's income remains in its hands, giving it a lot of flexibility. That money can fund the business's expansion, pay off debt, buy back shares, or even buy other companies. A steep payout ratio reflects little flexibility for the company, less room for dividend growth, and a stronger chance that if the company falls on hard times, it will have to reduce its dividend.

Peering into petroleum refining
Below, I've compiled some of the major dividend-paying companies that have refining operations (and a few smaller outfits), ranked according to their dividend yields:


Recent Yield

5-Year Avg. Annual Div. Growth Rate

Payout Ratio

My Watchlist

Calumet Specialty Products Partners (Nasdaq: CLMT) 8.8% * 397% Add
YPF 6.8% 2.3% 38% Add
Royal Dutch Shell (NYSE: RDS-A) 4.7% 21.1% 49% Add
ConocoPhillips (NYSE: COP) 3.3% 12.1% 28% Add
Statoil (NYSE: STO) 2.8% (0.7%) 38% Add
Chevron 2.7% 10.1% 30% Add
ExxonMobil (NYSE: XOM) 2.1% 9.0% 28% Add
China Petroleum & Chemical 2.1% 15.5% 10% Add
Marathon Oil 2.0% 9.4% 27% Add
Suncor Energy (NYSE: SU) 0.9% 28.1% 22% Add
Valero Energy (NYSE: VLO) 0.7% 7.4% 35% Add

Data: Motley Fool CAPS.
* Dividend varies widely from year to year.

If you want big yields now, you might first look at Calumet Specialty Products Partners and YPF. But Calumet has somewhat spotty dividends and a sky-high payout ratio, while YPF's dividend growth rate has been rather slow.

Instead, let's focus on the dividend growth rate, where Suncor Energy leads the way. Its growth rate is so steep, though, that it may be hard to maintain for long. And its current yield is low; if its dividend growth does diminish, its payout will take a while to grow to an attractive level.

Just right
As I see it, among the common stocks above, ConocoPhillips and Royal Dutch Shell give you the best of everything for a dividend stock. They sport high yields, healthy dividend growth rates, and reasonable payout ratios. They offer some solid income now and a good chance of strong dividend growth in the future.

Of course, as with all stocks, you'll want to look into more than just a company's dividend situation before making a purchase decision. Still, these stocks' compelling dividends make them great places to start your search, particularly if you're excited by the prospects for this industry.

Do your portfolio a favor. Don't ignore the growth you can gain from powerful dividend payers.

To get more ideas for great dividend-paying stocks, read about "13 High-Yielding Stocks to Buy Today."