Which Of The Russell 3000 Energy Companies Is Most Attractive To Dividend Investors?

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 |  Includes: AHGP, COP, CVX, HFC, SXL, VLO
by: Arie Goren

Many energy companies pay dividends, among the 277 energy companies that are included in the Russell 3000 index 162 companies pay dividends. The average annual dividend yield of these companies is 4.67% while the median is 4.11%. VOC Energy Trust (NYSE:VOC) has the highest yield at 14.56%, and Pioneer Natural Resources Co. (NYSE:PXD) has the lowest yield at 0.08%.

In this article, I tried to determine which of the Russell 3000 energy companies is the most attractive for dividend-seeking investors.

Russell 3000 Index

Description from Russell Investments:

The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 3000 Index is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected.

I consider that besides healthy dividend yield, low payout ratio and consistent dividend growth are the most crucial factors for dividend-seeking investors. In addition, since dividend investors try to avoid too much risk, The Sharpe ratio, which measures the ratio of reward to risk, is also extremely important.

Explanation of Sharpe Ratio

A ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted performance. The Sharpe ratio is calculated by subtracting the risk-free rate - such as that of the 10-year U.S. Treasury bond - from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns.

The Sharpe ratio tells us whether a portfolio's returns are due to smart investment decisions or a result of excess risk. This measurement is very useful because although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been. A negative Sharpe ratio indicates that a risk-less asset would perform better than the security being analyzed.

I have screened the Russell 3000 energy companies that pay dividends according the above-mentioned principles.

The screen's method requires all stocks to comply with all following demands:

  1. The payout ratio is less than 100%.
  2. The annual rate of dividend growth over the past five years is greater than zero.
  3. The forward dividend rate is equal or greater than the trailing dividend rate.
  4. Sharpe ratio is greater than 1.0.

Furthermore, I ranked all the stocks that complied with all the required demands according to a formula that I constructed, which gave 35% weight to the yield, 35% to the payout ratio, 20% to the dividend growth and 10% to the Sharpe ratio.

I used the Portfolio123's powerful screener and ranking system to perform the search. All the data for this article were taken from Portfolio123. After running this screen on June 07, 2013, before the market open, I discovered sixteen energy stocks.

The table below presents the sixteen companies in the order of their rank.

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The table below presents the dividend yield, the payout ratio, the annual rate of dividend growth over the past five years and the Sharpe ratio for the sixteen companies.

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The table below shows the most influential parameters, for dividend-seeking investors, for the six best ranked Russell 3000 energy companies according to my criteria.

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Chart: finviz.com

CVX Dividend Chart
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CVX Dividend data by YCharts

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Chart: finviz.com

SXL Dividend Chart
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SXL Dividend data by YCharts

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Chart: finviz.com

VLO Dividend Chart
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VLO Dividend data by YCharts

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Chart: finviz.com

COP Dividend Chart
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COP Dividend data by YCharts

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AHGP Dividend Chart
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AHGP Dividend data by YCharts

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Chart: finviz.com

HFC Dividend Chart
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HFC Dividend data by YCharts

Conclusion

Which of the six energy companies is the most attractive for dividend-seeking investors? It is not easy to determine. All the six stocks look quite attractive to dividend-seeking investors due to their solid dividend and their long-term track record of consistent and rising dividend payments. Chevron Corp (NYSE:CVX) has a solid dividend yield of 3.29% and a low payout ratio of 27%, but it has mediocre earnings growth prospects, and its PEG ratio is very high at 3.71. Sunoco Logistics Partners LP (NYSE:SXL) has a high dividend yield of 3.90%, but its forward P/E is the highest among the six companies. Valero Energy Corp (NYSE:VLO) has the lowest PEG ratio among the six companies, but it has the lowest yield at 2.07%. ConocoPhillips (NYSE:COP) has a high dividend yield of 4.28%, but it has mediocre earnings growth prospects, and its PEG ratio is quite high at 2.44. Alliance Holdings GP LP (NASDAQ:AHGP) has the highest yield among the six companies at 4.91%, but its payout ratio is quite high at 82% and its trailing and forward P/E are quite high at 18.01 and 16.57. HollyFrontier Corp. (NYSE:HFC) has low trailing and forward P/E of 5.29 and 8.61, but its yield is only 2.55% and its average annual EPS growth estimate is only 3.35%. Considering all these factors, I can't see one stock, which is clearly superior to the others. In my opinion, a portfolio of the first four stocks: CVX, SXL, VLO and COP can give a satisfying long term return to the dividend investor.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.