Finding the Best Dividend Paying Equities: The Case of Enterra Energy Trust

Includes: ELRN, ENT
by: The Stock Masters

The Stock Masters submit: Most investors these days know the power of dividends and the importance of including them in your long-term portfolio. If you are new to investing, what you are about to read will make a positive impact to your portfolio. If you are an experienced investor but are stuck in a rut, this article can help you get you back on course.

First of all, what are dividends? Typically, when a company is making a profit, it distributes those profits to its owners (the shareholders) by way of a dividend. The frequency of these varies by country. In the United States, dividends are usually declared quarterly by the board of directors.

When a company incurs a loss during a year, it may opt to continue paying dividends from the retained earnings from previous years or to suspend the dividend. Where a company receives a one-off gain, e.g. from the sale of some assets, and has no plans to reinvest the proceeds, the money is often returned to shareholders in the form of a special dividend.

Investing in stocks that pay dividends requires potential shareholders to research what type of dividend a company is paying. You wouldn't want to invest in a company such as Elron Electronic Industries (ELRN),which issued a 31% dividend yield this year. What appeared to be a 'sit back and watch the money roll in' decision turned out to be not that simple - Elron paid out gains from a sale of business as a one-time special dividend. Don't be deceived by one-time dividends.

Here's another scenario: you've picked up the perfect dividend stock, yielding 10% a year, you haven't looked at it in 6 months and when you do, you see the stock price has nearly dropped in half. What happened? You didn't keep an eye on it, and a month after you bought it they decided to stop paying a dividend completely. Keep an eye on your dividend stocks.

I'll leave you with one dividend stock that I think is worth investing in - Enterra Energy Trust (NASDAQ:ENT). In the last year Enterra's stock price has dropped in half, mainly due to two acquisitions: High Point Resources and Oklahoma Assets. They've also cut their dividend from a 90-100% payout to a 60-70% payout (still a hefty 12.5% forward yield) This is part of a move to change their business model for higher growth and long term sustainability. Q2'06 highlights included:

1. Record average total production of 14,339 boe/day for the second quarter, compared to 5,990 boe/day for the same period last year;
2. Exit production sales volumes increased by 102% to 13,723 boe/day;
3. Revenues increased to $65.9 million, an increase of 121% from the comparable period last year;
4. Production expenses per boe were reduced by 37% to $8.22/boe, and per boe G&A expenses fell by 31% to $3.88;
5. Cash distributions of $26.7 million declared during the quarter, for a payout ratio of 96%
6. Funds from operations increased by 126% to $27.7 million in the second quarter of 2006;

While those highlights do sound good, hold on -- as a result of significantly higher depletion and depreciation costs related to the High Point and the Oklahoma Asset acquisitions, the Trust realized a net loss of $0.3 million for the second quarter of 2006 compared to net earnings of $2.6 million for the comparable period in 2005. On a per unit basis, the Trust realized a net loss of $0.01/unit compared to a net gain of $0.10/unit in the second quarter of 2005.

In spite of that, I think that once they have digested the costs due to these acquisitions, Enterra may post higher profits and dividends, which should in theory raise the stock price.

ENT 1-yr chart:

ENT 1-yr chart

So what did we learn today? Even dividend stocks require research, and make sure the dividend meets your expectations.

Article written by Eric Cheshier.