After an unexciting year of paying off debt and being fiscally responsible, I am finally ready to buy my next stock. My first decision is not what I want in a company, but rather what I want in my portfolio. Am I looking for consistency? Explosive growth potential? A dividend?
I'm actually on the hunt for a stock that combines option A with option C, a solid value play that generates a stable dividend. Now that I know what I want, I can begin to narrow my search for the company that offers both.
Buy what you know
Love it or hate it, this phrase is everywhere in investing. It becomes sort of irrelevant at some point, because if you don't "know" something, you can very easily go out and "learn" it. That being said, I've been completely submerged in the oil and gas industry for the past four months, and that's most likely where my stock pick is coming from. I understand how the industry works, what I want to see in a company's financials, and who the players are and how they compare to one another.
Dividend search
The first criterion I'll tackle is a strong dividend. Let's take a look at eight energy companies with dividend yields greater than 2%.
|
Company |
Dividend Yield |
|---|---|
| Whiting USA Trust (NYSE: WHX) | 17.28% |
| SandRidge Mississippian Trust (NYSE: SDT) | 11.45% |
| SeaDrill (NYSE: SDRL) | 8.49% |
| Total (NYSE: TOT) | 6.19% |
| Statoil (NYSE: STO) | 4.39% |
| EnCana (NYSE: ECA) | 3.94% |
| Chevron (NYSE: CVX) | 3.10% |
| ExxonMobil | 2.32% |
Source: FinViz.com
The dividend yields run the gamut here, and while the list includes several stalwarts, I can eliminate a few stocks right off the bat.
Crossing 'em off the list
Whiting USA Trust is technically a REIT, an entity forced to pay out most of its profits to investors, which explains its astronomical dividend yield. My portfolio isn't ready for something like that right now, though, so I'm giving it the axe.
Similarly, while I really like SandRidge Mississippian Trust as an investment opportunity, the trust will eventually expire and isn't right for my portfolio at this stage in the game.
Though I like its $1 billion investment in solar leader SunPower, Total's reliance on shaky European markets and its problems operating in Syria and Africa are persuading me to cross it off the list for now.
EnCana's stock has tanked this year, dropping more than 35% since January. The company is trying to improve its debt situation via asset sales and by living within its means, aiming to have capital investment and dividends equal expected cash generation. The company also plans to reduce capital spending in its dry gas plays, focusing on production of the more lucrative oil and natural gas liquids plays. I think there is a major upside to EnCana, but it is not the stalwart I'm looking for.
SeaDrill is fellow Fool Travis Hoium's pick as the best stock among oil drillers. Its dividend yield is more than enticing, and it has performed relatively well in the wake of the backlash against deepwater drilling. I have no real reason not to pick this stock, other than because I'd prefer a bigger company that generates more revenue to serve as a building block for my portfolio.
Exxon, Chevron, and Statoil are all that remain.
Three left
These three oil and gas producers have all performed well this past year, beating the S&P and generating positive returns for investors.
Statoil Stock Chart by YCharts.
This is the consistency that I'm after. All three companies meet my stalwart/dividend criteria, which means there is only one other factor that needs to be considered: budget.
The Fool advocates for smart, responsible investing, encouraging investors to pay off debt and wait to put money into a stock if they may need the cash in the next five years. It's a rule I've always played by and will affect this investment decision.
The winner
The next stock I'm buying is Statoil. The stock is currently trading for around $25 a share with a trailing P/E of 7.4; the stock is nearly as cheap as I am.
But there is more to it than that. Statoil has proved to be forward-thinking, which is something I demand out of a long-term investment. The company purchased U.S. shale oil and gas producer Brigham Exploration this year, targeting the American energy boom to add depth to its global operations.
For diversity, the company is engaged in a project with the Department of Energy to develop floating wind turbines off the coast of Maine. The company already has a prototype operating off the coast of Norway.
Finally, closer to its traditional operations, Statoil also recently discovered one of the largest reserves in the North Sea, estimated to contain 900 million to 1.5 billion barrels of oil equivalent. I believe the future is bright for the Norwegian company.
Foolish takeway
Though I'm only buying one stock in the next few days, going through this exercise has turned up several ideas I plan to track via My Watchlist and potentially buy in 2012.
Fool policy precludes me from buying right now, so I'm headed over to CAPS to give Statoil a green thumbs-up until my no-trade window expires. The nice thing about CAPS is that I can paste my investment thesis into a CAPS pitch, allowing me to revisit my thoughts down the road.
Looking for a list of great stocks to whittle down for your next investment? Check out The Motley Fool's special free report "13 High-Yielding Stocks to Buy Today."
