The energy sector typically hasn’t been a great place to find dividend stocks outside of the various super majors or master limited partnerships. That’s because, historically, drilling for crude oil is a relatively expensive proposition.
E&P firms and other energy sector companies have been forced to plow their earnings and cash flows back into the underlying businesses. Most energy stocks yield about 1% or less, which doesn’t exactly put them into the big-time dividend stocks category.
That is, it didn’t before the current downturn. The recent 50% or so fall in crude oil prices has knocked down valuations for many dividend-paying energy stocks. Investors can now find juicy yields in shares of battered firms, many of which are paying more than 3% in dividends.
None of them are completely risk-free, of course. However, the higher yield does make many of them that much more attractive today.
Here are three battered energy sector dividend stocks to buy today.
Energy Sector Dividend Stocks: Tidewater Inc. (TDW)
Dividend Yield: 3.8%
To feel the real effects of the oil price decrease, investors need to go offshore — way offshore — and focus on the oil service stocks catering to the deepwater drillers. The drop in prices has made many deepwater projects uneconomical in today’s market.
That same drop turned Tidewater Inc. (NYSE:TDW) into a pretty decent dividend stock.
TDW is the largest offshore supply boat operator in the world. Getting personnel to an offshore rig or moving equipment to various offshore drilling sites takes a vast network of boats and vessels to get the job done. Tidewater basically created the oil and gas workboat industry and currently operates more than 300 vessels.
Investors have dumped TDW stock as the oil prices have fallen. But here’s the thing: Many offshore projects take multiple years to complete. Projects that have already been started aren’t going to stop, even with oil at $50 per barrel. Secondly, wells that are already following will continue to flow, all of which means that TDW is still going to get business.
Meanwhile, the firm’s huge global footprint (Tidwater operates in more than 60 countries), ample liquidity (it hasn’t touched its $600 million in available credit) and leading status will continue support its now generous dividend payout. TDW has been paying that dividend since 1992 and currently yields 3.8%.
Energy Sector Dividend Stocks: Vanguard Natural Resources, LLC (VNR)
Dividend Yield: 8.6%
When oil prices were riding high, upstream MLPs like Vanguard Natural Resources, LLC (NASDAQ:VNR) were the dividend stocks du jour. As MLPs, these pass-through producers churned out much of their cash flows back to investors as high distributions — often monthly. VNR was no exception.
The unfortunate thing is that when you kick out much of what you earn as dividends, when commodity prices fall, you can’t distribute as much. VNR was forced to cut its generous dividend payment by 44% this year, and the firm saw its share price plunge 47% over the past 12 months.
Today, VNR is yielding nearly 9%, and that yield may actually be safer than its previous payout.
Aside from keeping leverage at a more acceptable level, the smaller dividend payout frees VNR to add to its production via acquisitions. Adding mature, producing wells is key to the upstream MLP business model — and it looks like VNR is winning on that front.
Within the past 40 days, VNR has agreed to buy fellow upstream MLPs Eagle Rock Energy Partners LP (Nasdaq:EROC) and LRR Energy LP (NYSE:LRE). Those transactions will add more than 3,000 producing wells into VNR’s mix and will be instantly accreditive to its cash flows and distributions.
While the dividend cut was painful for investors, it made VNR into one of the better dividend stocks in the energy sector.
Energy Sector Dividend Stocks: Cenovus Energy Inc (CVE)
Dividend Yield: 5.4%
If you think the energy sector in the United States has suffered at the hands of lower crude oil prices, you haven’t been to Canada.
Oil sands producers such as Cenovus Energy Inc (USA) (NYSE:CVE) have been hit harder as Western Canadian Select (WCS) benchmarked crude oil is trading to an even bigger discount. Stocks like CVE have fallen by about half since the crude oil decline.
However, that drop also made CVE a pretty interesting dividend stock opportunity.
Cenovus uses low-steam-assisted gravity-drainage. That form of drilling is a very cost-competitive form of bitumen mining, with gravity doing much of the work. That way, CVE can tap its long-lived assets for cheaper.
CVE also owns its refineries. It can use its own cheap crude and profit from high-margined refined products. In fact, analysts at TD Bank predict that Cenovus will earn an extra $500 million in cash flows based on improving crack spreads at its facilities.
Those cash flows should help CVE continue to pay for its 5.4% dividend. Recent cuts to its workforce and equity raises to shore-up funds won’t hurt either. And if oil prices continue to recover — as they have over the last month or so — CVE will be able to capitalize on that with its recent increases in production.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
More From InvestorPlace
- The 7 Best ETFs to Buy for June
- 10 “Safe” Stocks to Buy Before a Pullback Begins
- 7 A-Rated Financial Stocks to Buy