Bargain Hunt in Oil With These 3 High-Yield Stocks

Get paid with generous, safe dividends while you wait for oil to rebound

Crude oil is in a world of hurt again, pushing back down into the low $40s and threatening to test the high $30s soon.

best dividend stocks bank stocksThere are a host of reasons for this, including the strong U.S. dollar as well as a glut of global supply and weak demand in China and other emerging markets. And as a result of the persistent headwinds for energy prices, a bunch of big-name energy stocks have taken it on the chin in 2015.

But long-term investors should remember that big sector downturns like this can be big opportunities for those who are looking for dividend-rich companies that will weather any short-term volatility and keep delivering juicy income streams for investors across many years to come.

In particular, I’m watching a narrow subset of energy stocks right now that are relatively insulated from crude oil prices — namely, MLPs that deal with energy infrastructure.

These master limited partnerships operate the pipelines and storage tanks for crude and natural gas, and as such are really just “middle men,” charging companies that use their infrastructure. Whether or not the exploration companies are operating at a loss or the wholesalers are taking it on the chin amid falling prices doesn’t matter — it’s simply a matter of someone using their gear and paying a toll along the way.

That business model provides for stability in a rocky energy market, and it also provides reliable revenue that helps feed tremendous dividends.

So what are these lower-risk energy stocks with big yields?

High-Yield Energy Stocks: Magellan Midstream Partners (MMP)

magellanMagellan Midstream Partners (MMP) is the poster child for a high-yield MLP that has great underlying metrics, but has seen its share price unfairly punished lately. Though MMP stock is down 14% year-to-date, it actually has been increasing distributions steadily.

In fact, payouts have been steadily on the rise recently, from a low of just under 49 cents in late 2012 to a current distribution of 74 cents — a 50% increase.

And thanks to strong cash flows, Credit Suisse just upgraded Magellan stock, with an “outperform” rating and a whopping $93 price target. Analysts are generally bullish on MMP: 13 analysts surveyed by Thomson/First Call have a median price target of $85 on the stock — some 20% better than current prices.

The yield of 4.2% isn’t quite as huge as some of the others on this list, but it’s growing fast, and MMP stock seems to have significant upside for its share price based on these recent targets.

And as Credit Suisse pointed out in its upgrade, the company has plotted a 15% growth in distributions this year and another 10% bump in 2016 — so that yield is sure to keep growing over time.

High-Yield Energy Stocks: Markwest Energy Partners (MWE)

markwestMarkwest Energy Partners (MWE) is another big payer that has seen its distributions steadily rise. Right now, MWE stock pays about 92 cents per quarter, but was paying just 64 cents at the end of 2010.

That’s a 44% bump in just five years.

Also encouraging is that in the company’s August 10-Q filing, net cash flows from operating activities — the most important indicator of Markwest’s health — were actually up year-over-year for the first six months of the year, from $357 million in the first half of 2014 to $363 million this year.

Sure, there’s volatility in energy prices, and MWE stock has been caught up in this with a decline of almost 13% year-to-date in 2015. However, strong operating cash flow shows cheap crude can’t ruin this company’s performance.

And with a 6.3% dividend, you have plenty of reason to buy in even if share prices go nowhere for a while.

High-Yield Energy Stocks: Energy Transfer Partners (ETP)

dividend stocks, etp stockEnergy Transfer Partners (ETP) has also been moving its distributions in the right direction, up to $1.03 quarterly from 89 cents in mid-2013 — a 16% bump in two years.

And with a headline yield of 8.1%, the dividend was already pretty darn robust to begin with.

Investors are mighty pessimistic on ETP, however, with shares down a dramatic 22% year-to-date. However, the company is now at a rock-bottom price, with Stifel Nicolaus recently reiterating its “buy” rating despite the downturn with a $60 price target — some 20% in upside from here.

The downtrend is sharp in Energy Transfer Partners, and perhaps more pronounced here than in any other MLP given its huge declines year-to-date. But that negativity is now clearly priced in, and the juicy dividends more than make up for any volatility risk.

Jim Cramer recently took to the airwaves to tout ETP after a strong earnings report, and investors can have confidence that this stock will come through this mess and move higher in the long term even if some immediate volatility is likely.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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