ConocoPhillips (COP) explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids on a worldwide basis. The company has managed to increase dividends for 13 years in a row. Over the past decade, it has managed to boost distributions by 15.10% per year. Currently, the stock trades at 10.90 times earnings, and yields 4.20%. Check my analysis of COP.
Chevron (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. The company has managed to increase dividends for 26 years in a row. Over the past decade, it has managed to boost distributions by 9.60% per year. Currently, the stock trades at 9.40 times earnings, and yields 3.10%. Check my analysis of Chevron.
Exxon Mobil (XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products. The company has managed to increase dividends for 31 years in a row. Over the past decade, it has managed to boost distributions by 9% per year. Currently, the stock trades at 9.40 times earnings, and yields 2.70%. Check my analysis of Exxon.
I would not advise putting more than 15-20% of one’s portfolio in a given sector however, in order to reduce risk. If oil prices fall back to the levels we saw during the financial crisis, and stay there for a few years, oil companies might be unable to continue with their generous share repurchases and dividend increases. This doesn’t mean this would happen, but the intelligent dividend investor needs to think about probabilities, and build a portfolio that would not permanently lose value and income should a string of unfortunate activities materialize.
In addition, I have gotten a little more creative with companies I like, that are slightly overvalued. For example, I like shares of Coca-Cola, which are trading at a forward 2013 P/E of 19.15 and forward P/E of 2014 of 17.70.
Because I find the stock a little rich to my taste right now, I sold one January 2014 put, with a strike of 40, at around $1.85 per contract. If the stock price trades below $40 per share at the time of expiration, I would buy the shares at the strike price. However, my cost would be essentially $38.15. This equates to a P/E ratio of 18.20.
Furthermore, I also sold a January 2015 put with a strike of $40 at $4.30 per contract. If exercised, this will translate into a cost basis of $35.70 per share or a P/E of 15.70.
I like the long-term economics of Coca-Cola, which should benefit from rising demand in emerging markets and integration of North American bottling operations. The company has strong brand name, which provides pricing power and solid profitability. Check my analysis of Coca-Cola.
Full Disclosure: Long WMT, JNJ, KO, CVX, COP,