Buying dividend stocks can be a great way to beat the market long term and the energy industry is one of the best places to look for consistent dividends. We never seem to be short on demand for energy and if you're positioned correctly the payouts can grow year after year.
Here are three dividend-paying stocks that I think hold a lot of long-term value.
Kinder Morgan
Transporting oil and natural gas around the country has always played an important role in energy, but the growth of natural gas and oil production has opened up growth opportunities for pipeline owners. Kinder Morgan (KMI 2.51%) has translated that opportunity into both growth through organic expansion via Kinder Morgan Partners and through acquisitions like the El Paso Pipeline buyout.
These two MLPs have experienced consistent earnings growth and as a result paid out consistent distributions to shareholders, mainly Kinder Morgan.
KMP Dividend data by YCharts
The encouraging thing long term is that natural gas demand should increase as domestic consumption increases and LNG export facilities are built in the U.S. Both factors mean more demand for Kinder Morgan. Combine that with growth in U.S. oil production and the potential to build a pipeline for Canadian oil sands to the West Coast for shipment to Asia and the future is bright for this company and its 4.6% dividend yield.
Seadrill
One of the big drivers of increased oil production in the U.S. is growing offshore drilling in ultradeepwater. This is where about half of the new reserves found this year have come from and it's driving demand for Seadrill's (SDRL) rigs.
The company already has one of the newest fleets of ultradeepwater rigs -- 16 in operation today -- and has a big backlog of eight drillships and four semisubmersibles under construction. These rigs can command $600,000 dayrates and contracts can run for years at a time because wells take so long to drill. That will add to revenue and bring high margins to growth in 2014 and beyond.
Seadrill is a leveraged play on ultradeepwater drilling, so keep an eye on dayrates and utilization in the industry. But if the trends we've seen in recent years continue, the company's 9.3% dividend yield should continue to grow.
NRG Yield
One of the newest dividend plays in energy is NRG Yield (CWEN 0.49%), a combination of traditional and renewable-energy assets that currently yields 3% and is planned to yield 3.6% by the third quarter of next year.
What NRG Yield is able to do is combine traditional electricity-generating assets with renewable-energy assets to capture tax advantages and still have strong exposure to consistent renewable energy cash flows. Projects like the California Valley Solar Ranch that's 48.95% owned by NRG Yield has a power-purchase agreement with utilities that guarantees its cash flow as long as it's generating power.
This creates a very consistent cash flow and when combined with debt can generate strong returns on equity. NRG Yield is not only a strong dividend yield, it's a great way to get exposure to the renewable energy market without betting on the winners and losers in wind or solar manufacturing.
