When looking for dividend stocks, it pays to keep it simple. And in the energy sector, you can’t get more simple than sand.
As hydraulic fracturing and horizontal drilling activity have surged, demand for frac sand has skyrocketed as well. During the fracking process, sand and other materials are pushed down into shale and used to help crack open the rock, allowing the hydrocarbons to escape. E&P firms will use an estimated 95 billion pounds of frac sand this year. And that’s just a drop in the bucket compared to its growth potential.
According to a new research note by Morgan Stanley, frac sand growth is set to surge by 96% in 2016 — eclipsing supply growth.
Here’s the problem: Not any old sand will do. It takes a variety of specialized and pure material to make the best frac sand. More importantly, only a few companies own the mines that have these types of sand. That limited supply is leading to rising earnings, sales and ultimately, profits for investors in the frac sand stocks.
Many of these frac sand stocks are structured as master limited partnerships (MLPs), meaning those hefty profits are distributed back to investors as hefty dividends. If you’re looking to add a dose of dividend stocks to your portfolio, the frac sand players have to be on your list. Here are three of the best.
Frac Sand Stocks To Buy — Hi-Crush Partners LP (HCLP)
Dividend Yield: 3.5%
As we’ve stated before, only specialized sand can call itself “frac sand.” And one of the best dividend stocks in the sector has that type of sand in spades.
Hi-Crush Partners LP (HCLP) operates a 561 acre facility in Wisconsin that produces roughly 1.6 million tons of high-quality monocrystalline frac sand each year. This Northern White frac sand is highly prized by the E&P industry and commands a high price. Through its massive distribution network in the Marcellus & Utica shales — along with contracts with such oil service superstars like Weatherford (WFT) –- HCLP continues to see rising sales and demand for its frac sand.
With all of that demand, HCLP is becoming quite a major player in terms of dividend stocks.
As earnings and cash flows have risen, so has the dividend on HCLP stock. Over the last four quarters, Hi-Crush has raised its distribution by 21%. The latest increase of 9.5% came on the back of record earnings and moves the distribution to $2.30 on an annualized basis. That bump gives HCLP a yield of around 3.5%.
While that initial yield isn’t the highest among MLPs, it is one of the fastest-growing. And when you add in the fact that HCLP shares have surged nearly 280% since going public in 2012, you can’t really complain too much.
Frac Sand Stocks To Buy — Emerge Energy Services LP (EMES)
Dividend Yield: 3.7%
Emerge Energy Services LP (EMES) is a great bet for anyone looking for dividend stocks in the energy sector.
EMES owns a variety of energy transportation and processing services. These businesses are somehow even more boring than sand, and they provide a nice stable cushion when it comes to earnings and cash flows. While they aren’t growing like weeds, these businesses are slowly expanding.
But like HCLP, the name of the game is frac sand.
EMES owns and operates three silica mines with around 3.6 million tons of worth of annual production capacity. More importantly — like HCLP — Emerge produces Northern White sand. But unlike HCLP, more than 60% of that production is rated at 50 mesh or coarser. That’s an even more premium product, and EMES is able to charge even more for its frac sand.
Add its vast rail terminal network and its easy to see why this is a prime pick for investors looking at dividend stocks. Shares currently yield 3.7%, but EMES has been growing that quite nicely. The latest was a 4% bump upward.
Frac Sand Stocks To Buy — U.S. Silica Holdings (SLCA)
Dividend Yield: 0.75%
I know what you’re thinking — that dividend yield isn’t very high. However, U.S. Silica Holdings (SLCA) is still a prime dividend stocks pick. The name of the game at SLCA is dividend growth — which is just as critical as initial yield.
SLCA owns a vast array of sand and aggregate assets. Its products are found in everything from paint to phone screens. However, frac sand continues to be its new bread and butter. In fact, SLCA recently announced plans to expand its capacity for the oil & gas sector by around 3.8 million tons worth of new production. Those expansion plans will be just a short train ride away from the prolific Eagle Ford and Permian Basin located in Texas.
All in all, these expansion plans should help it boost profits over the longer term. Already, the firm has lifted its full-year earnings and cash flows guidance based on rising sales and demand for its frac sand.
The only downside is that SLCA isn’t structured as a high-paying MLP. So the firm’s dividend only yields around 1%. Nonetheless, U.S. Silica has raised its dividend and is only paying out around 24% of its cash flows — leaving plenty of increases for the future and making SLCA worthy of dividend stocks investors.
And let’s not eliminate the possibility that SLCA could follow its rivals and structure some of its assets as a MLP. That would certainly boost its payouts even further.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.