Energy prices can be extremely volatile and react to a great number of events such as natural disasters, the political unrest in countries that supply great amounts of oil and accidents by the oil companies that not only create a public backlash, but cost billions to clean up. Taking a position in energy companies that not only flourish in a constantly evolving environment, but offer lucrative returns through dividends, allows you to take a stronger position when prices are down through the reinvestment of dividends that will pay off when prices begin to climb again. The current diplomatic situation between Iran and the rest of the world is beginning to set the stage for a major upswing in the cost of oil and natural gas, which could make now the best time to enter these stocks- before the gains have been realized. Let's take a look at the following stocks for some ideas on where to take a position before the energy market pops again.
Nustar Energy (NS) is a master limited partnership that spun off from Valero Energy (VLO) and now owns most of Valero's pipeline network and storage facilities. A series of acquisitions over the year that include a major grab from Citgo in 2008 of some refineries and asphalt terminals has allowed Nustar Energy to take a place among the largest independent liquids storage operators in the world. Nustar's profits have remained consistent over the past three years, with an average of $229 million per year.
Nustar's consistency makes it a great buy due to its growing dividend, which last paid out at $1.095 per, which is up from $1.075 two quarters ago. The dividend pays at a ratio of 0.35, giving it plenty of room for growth and its current yield is over 7%, making this a reliable dividend stock for income investors due to its regularity and dependability. In the event that energy prices spike, Nustar is in the perfect position to gain as well due to its operation base in the United States which is unaffected by the Middle East.
NuStar GP Holdings (NSH) is a general partnership that affords income investors with another opportunity to gain from Nustar's stable profits if they are looking to stay away from a limited partnership. The difference between Nustar GP Holdings and Nustar Energy is mainly that of risk and reward. Nustar Energy's stock rate is very stable and unlikely to spike or fall while Nustar GP Holdings has been on the move for three years with a gain from $18 per share to $33. Over the past year, its dividend has grown from $0.48 per share to $0.51 and it pays a yield of 6%. I believe investors willing to take on a little more risk should take a position here as it offers the chance for higher gains while those with a conservative approach will not lose with Nustar Energy's limited partnership.
Energy Transfer Partners (ETP) is a limited partnership that is also centered in the storage and transportation of natural gas. Energy Transfer operates around 20,000 miles of pipeline and recently acquired a 50% interest in Citrus Corp which owns the major pipelines system in Florida. Energy Transfer partners has paid a steady quarterly dividend of $0.89 per share for the last four quarters at a payout ratio of 0.74 and yield of around 7%. I believe this is a great buy in 2012 for its potential to grow into its new acquisitions and its steady and dependable returns.
Boardwalk Pipeline Partners (BWP) is a limited partnership with interests in over 14,000 miles of pipeline that span from Texas into Ohio. Its pipeline and 11 storage facilities help this stock generate a steady stream of revenue that has allowed it to increase its dividend each quarter over the last year. It currently pays out at $0.53 per share and provides a yield near 8%. I think this is a safe buy but it lacks the explosive growth potential of the others. Its stock has risen $5 per share over three years from $22 to $27 and it is a high yielding dividend stock, but Nustar GP Holdings might be better for investors looking for steep gains rather than something safe and steady.
Cheniere Energy Partners (CQP) is a limited partnership with interest in the largest import terminal of liquid natural gas on the North American continent. Sabine Pass, located in Sabine, LA, will have a capacity of 4 billion cubic feet per day of regasification capacity, providing Cheniere Energy Partners with an economic moat that allows it to continue to support its steady dividend of $0.43 per share at a current yield of 8%. Its stock has also quadrupled in value over the past three years from $5 per share to around $21 now and I see this as a great buy with both a high yield and steady growth potential.
Nustar GP Holdings and Cheniere Energy are perfect buys for investors who are willing to take on a little more risk for greater reward while I believe Nustar Energy's master limited partnership and Energy Transfer Partners show the greatest potential for consistent and steady returns. I think that a diversification strategy between all of these stocks provides the perfect coverage as it combines lower risk positions with steady gains with slightly higher risk positions that have the potential to be home runs.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.