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6 High-Yield Plays in Energy

However, the big payouts come with some serious risks

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Transocean (NYSE:RIG) is a controversial dividend play. Its forward yield is 6.4% — if the company can follow through on its plan to pay a 79-cent quarterly dividend. But there are questions about whether this yield can hold up because of RIG’s poor track record of capital allocation and weak earnings results.

From a long-term standpoint, RIG represents an attractive turnaround play in an improving sector, especially now that there is more clarity on its exposure to the Gulf oil spill. Transocean also remains on the deep end of its historic valuation range — in terms of price-to-book and price-to-sales — even after its recent rally. However, with the stock up 28% from its December low, caution is warranted at this point. Watch Transocean closely through the remainder of the year to see if it can deliver strong enough results to support the high yield.


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Norway-based deepwater driller SeaDrill (NYSE:SDRL) used to be a hidden gem in the energy sector, but investors seem to have discovered the stock during the past four months. From an October low of $25.88, SeaDrill has surged more than 50% to the mid-$38 range, and it closed Tuesday just a hair short of its 52-week high.

Despite this strong performance, SDRL shares continue to offer a yield of 8%. The dividend can fluctuate, as Jeff Reeves pointed out in November, but the company’s rising free cash flow and strong growth — it’s on track for an EPS gain of 13.5% in 2012 — provide solid support for the dividend to stay where it is or rise from current levels. The shares aren’t particularly expensive after the recent rally, commanding just 12 times forward earnings, but SeaDrill has come so far, so quickly, that it likely will pay to wait for a pullback. Be ready to take advantage of any weakness to build a position in one of the top dividend stocks in the energy sector.

As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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