The S&P produced a jaw dropping 25% increase in 2013. Some investors have become concerned that the run had overshot and a correction might be upon the horizon. At the same time, they are do not wish to stay out of the market in the event that prices continue to rise. One strategy is to purchase high dividend stocks that will follow the general market should it continue to rise and provide a cash flow in the event of a correction. One sector to look at for these stocks is the energy sector which has not risen as aggressively as other areas.
One benefit of energy stocks is the natural hedge in energy prices. One concern has been the amount of money the Fed has been pumping into the system and the possibility that this money would sooner or later find its way into the general economy and spur inflation. As the world's most consumed commodity, energy provides a direct hedge when it rises in step with inflation.
Market Cap (M)
BP is one of the largest energy producers in the world with a market capitalization over 150B. BP had a respectable year and pays a dividend of 54 cents per ADR per quarter. This translates into a dividend yield of 4.5%. After suffering the 2010 Gulf of Mexico oil spill, risks from litigation are fairly limited and already priced into the share price. Forward earnings are heavily diversified with a combination of oil, gas and midstream assets that provide very predictable forward cash flows. The dividend history is very strong with only a brief period of six months directly after the oil spill where BP was restricted from paying a dividend. Otherwise BP has been a consistent dividend payer for more than 10 years.
ENI, like BP, is another European Supermajor from Italy with a market capitalization over 85B. ENI pays a dividend of $1.466 and $1.392 which translates into a yield of 6%. Even after withholding taxes, this is a reasonable yield. ENI has had very strong growing revenue and cash flows over the last 5 years with a variety of assets supplementing and diversifying revenue streams. It is also a consistent dividend payer for the last 10 years.
Pengrowth is a Canadian mid-cap E&P producer with a market capitalization over 3.2B. Pengrowth pays a dividend of CAD $0.04 monthly, which translates into a massive yield of 7.3%. The company has had a small recovery in its share price from a low of $3.80 to $6.20 and there has been positive sentiment about its heavy oil project Lindbergh which will start contributing significantly in 2014 and 2015. While in recent years it has reduced its dividend per share, it has paid a dividend for the last 25 years without interruption. Another key feature is that it pays its dividend monthly, which is ideal for cash seeking investors like retirees. I own PGH and treat it as a monthly income supplement.
Penn West Petroleum Ltd (PWE)
Penn West Petroleum is another mid-cap E&P producer. It has a market capitalization over $4.0B. PWE pays a dividend of CAD $0.14 every quarter which translates into a yield of 6.3%. PWE has had a weakening share price over the last five years and had reduced its dividend from CAD $0.27 a quarter to CAD $0.14. The company recently appointed a new CEO and is in the process of engineering a turnaround. The new strategy is to focus on profitability by divesting assets and more focused capital investment. Downside is limited as the company has enough operating cash flow to fund capital expenses and sustain the $0.14 dividend. Despite its recent history, PWE has paid a dividend since its listing in 2005, over 8 years in a row. I own PWE and treat it as a higher risk potential upside play with a cash flow component.