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ConocoPhillips Is a Great Stock for Your IRA

By Matthew DiLallo - Apr 12, 2013 at 2:00PM

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Tax day is coming up. If you're planning a large deposit into your IRA, here's one stock you'll want to buy.

With tax day fast approaching, it's possible that you'll need to make a fairly large deposit in your IRA. While I'm not so lucky this year, if I were adding capital to my retirement account, ConocoPhillips (COP 0.12%) would be the first stock I'd buy. Let's drill down into this energy giant and see why it gets top billing.

Visible growth
ConocoPhillips has spent the past few years rebalancing its portfolio and slimming down so that it is in a better position to grow. In the process, its shed lower margin assets like its refining arm Phillips 66 (PSX -1.21%) along with a list of other lower-growth, low-margin, and non-core assets. The spin-off of Phillips 66 stock to investors has been well received by the market and has been a brilliant move by the company. By freeing the company, it has enabled Phillips 66 management team the freedom to pursue the best plan for its business, and not have to please its parent. 

These moves have also given ConocoPhillips the flexibility to invest in high-margin projects, which will drive the company's ability to meet its goal of growing margins by 3%-5% annually through 2017. As margins improve it has the potential to drive $6 billion of incremental cash flow. That cash flow can be used to compound its growth going forward, or it can be returned to investors. Either way, it sets ConocoPhillips' stock up to be a long-term, winning investment.  

In addition to margins, the company believes it can boost its production by 3%-5% annually. To get there it plans to maintain discipline, as you can see from the following chart:

Source: ConocoPhillips Investor Presentation

With ConocoPhillips you have visible growth, but its not growth at all costs. Instead, you have a company that's pursuing increasingly more profitable growth which should yield stellar long-term stock returns for investors.

Compelling dividend
Not only does ConocoPhillips offer steady growth, but the company pays a very generous dividend on its stock that's currently just below 4.4%. For perspective, it's a lot higher than Chevron's (CVX -0.71%) 3% dividend. While Chevron is in the midst of a major production growth phase, both companies are likely to grow projection by 5%. That means, all things being equal, ConocoPhillips has the potential to outperform thanks to that higher dividend.

What's interesting about that dividend rate is that it isn't that much below the rate you can get in a master limited partnership these days. Believe it or not, its right in line with Enterprise Products Partners (EPD -0.04%), even after the company raised its distribution this week. Enterprise's revenue is less tied to commodity volatility, but that works both ways, as higher natural gas prices could boost the value of ConocoPhillips stock even more in the future.

Final thoughts
With a solid plan to grow production and margins, ConocoPhillips should deliver outstanding results over the next few years. Add in a very generous dividend and you can see why it's personal favorite of mine.

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Stocks Mentioned

ConocoPhillips Stock Quote
ConocoPhillips
COP
$104.61 (0.12%) $0.13
Chevron Corporation Stock Quote
Chevron Corporation
CVX
$166.86 (-0.71%) $-1.20
Phillips 66 Stock Quote
Phillips 66
PSX
$94.36 (-1.21%) $-1.16
Enterprise Products Partners L.P. Stock Quote
Enterprise Products Partners L.P.
EPD
$26.60 (-0.04%) $0.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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