5 Energy Dividend Stocks: Which Should You Buy

Includes: APL, DPM, EROC, SGU, TLP
by: Dividend Kings

Dividends can provide stable and reliable returns in a market that is ruled by uncertainty and governed by events that are completely outside of the control of investors. In the energy sector, prices are extremely volatile and can be affected by as little as a change in traditional weather patterns that results in warmer winters or as much as a hurricane hitting the Gulf of Mexico or the United States going to war. Focusing on energy stocks that provide stable and lucrative dividends allows you to benefit on the upswing while being able to reinvest and buy into a stock while it is cheap without any additional cost through dividend reinvestment. Let's take a look at the following energy stocks to explore ideas for long term opportunities and reliable returns over time.

Atlas Pipeline Partners (NYSE:APL) operates a natural gas pipeline system that extends from Ohio into western New York and processes more than 50 million cubic feet of natural gas per day. Its profits took a great leap from $58 million in 2009 to post $275 million in 2010, showing steps in the right direction after its loss of more than $584 million in 2008. As a result, its dividend has grown over the past four quarters from $0.40 per share to $0.55 at a payout ratio of 0.63 and a yield near 6%.

Atlas Pipeline Partners stock has also seen a great three years as it moved from $7 per share to $37, but it may be reaching its worth soon and ready for a pullback. I think that this is a much greater long term investment than a short term position, and I feel Atlas Pipeline Partners will be able to hold its dividend but it may lose value due to a decline in profits in 2011. It had an outstanding first quarter that generated a net of over $240 million, but then floundered through the rest of the year.

Eagle Rock Energy Partners (NASDAQ:EROC) is teetering on the line of profitability and showing very inconsistent returns from year to year. It posted over $87 million in profits in 2008 followed by two years in the red with losses of $171 million in 2009 and $5 million in 2010. It started 2011 with a $52 million loss that was followed by gains in the second and third quarters that brought the company into profitability. Regardless of its struggles, its share price has grown over the past three years from $7 to $11 per share and currently pays out a dividend of $0.21 per share at a ratio of 0.28 and a yield over 7%.

I believe that Eagle Rock Energy Partners is overpriced and shows inconsistency from year to year. A current yield of 7% and its steady growth in value make it attractive, but I believe that it is too unreliable to take a long term position in.

DCP Midstream Partners (NYSE:DPM) has shown its own ins and outs with profitability, but is looking at its second consecutive year in the black. In 2010, it posted $31 million in net revenue and followed with profits of $84 million in the first three quarters of 2011. Its dividend has grown from $0.62 per share to $0.65 over the last four quarters and pays at a ratio of 0.48 with a yield over 5%. Unlike Eagle Rock Energy Partners, I believe that DCP Midstream Partners has some room to grow over the next few years and its growing dividend will provide lucrative returns when it is reinvested.

Star Gas Partners (NYSE:SGU) is coming off of three straight years in the black and looks like it will provide reliable returns with an unwavering dividend payout each quarter of $0.08 per share that provides the $5 stock a yield of near 7%. Its payout ratio of 0.22 suggests that it will be able to sustain its dividend over the long term and its share value has remained within $1.50 for the past year. This stock is a great buy for steady dividend returns but not ideal if you are looking for something with significant growth potential.

TransMontaigne Partners (NYSE:TLP) is the epitome of consistency, posting $24 million in profits each year for the last three years. Its gross revenues have grown each year from $138 million in 2008 to $151 million in 2010 while all of its expenses have remained the same, suggesting that the company is passing on its growth in revenue to its shareholders as evidenced by its most recent payout ratio of 1.37 on its last dividend of $0.63 per share. I believe that its growing revenues and dividend make this a worthy buy for long term results.

I believe that DCP Midstream Partners is the winner in terms of immediate and long term returns and has the most growth potential of the group. Star Gas Partners and TransMontaigne Partners both deliver consistency and are low risk buys that will show results, but I don't believe either stock will be explosive enough to appease the needs of investors who are in for short term gains. Eagle Rock Energy Partners is the most inconsistent and risky position of the group and I believe that it is headed for a slowdown or a pullback in the near future, making it the least attractive to me.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.