Think back to your last cocktail party conversation about the stock market. I’d wager a pretty penny that the subject of your banter was not “the best dividend stocks to buy today.”
Even fewer people tend to gab about the best dividend stocks to buy today… in the energy sector.
It’s more likely you were fondly recalling a big winner, or a particularly sexy investment that has been walloping the market in 2015. Stocks like Netflix (NFLX), Amazon (AMZN), and Starbucks (SBUX) all come to mind.
At a time when energy stocks are wildly out of favor — it’s the single-worst-performing sector in the S&P 500 this year, with the Energy SPDR ETF (XLE) posting losses of 12% — high-dividend energy stocks are about as contrarian as it gets in the stock market today.
That can be a good thing or a bad thing, of course.
But if you, like me, generally believe in reversion to the mean, then now’s the time to take a look at these three royalty trusts, and what makes these energy plays some of the best high-dividend stocks to buy now.
3 High-Dividend Stocks to Buy Now, #1: BP Prudhoe Bay Royalty Trust (BPT)
Dividend Yield (ttm): 13.6%
Shelf Life of Trust: Roughly 13 years
Production Mix: 100% oil
Royalty trusts aren’t technically stocks themselves, though in some ways they act like them. For instance, they trade and fluctuate throughout the day, and they reward their shareholders through routine dividends.
Instead of exploring and drilling for resources itself, royalty trusts are merely financial instruments. When you buy into a royalty trust, you’re buying rights to the natural resources of a specific geographical area, and the rights to receive a royalty from the sale of those resources.
BP Prudhoe Bay Royalty Trust (BPT) is just such a trust, and at a yield of 13.6%, it pays far better than most good dividend stocks I can spot in today’s market. In this case, BP (BP) created BPT to raise money quickly by selling off a portion of the annuities that come from oil production in the Prudhoe Bay oil field in Alaska.
Longtime BPT bulls have been well-rewarded for their investment. Over the past 15 years, BPT’s total return comes out to an incredible 1,650%. A $10,000 investment in October of 2000 would be worth more than $175,000 today.
On the other hand, $10,000 invested in the S&P? That’d only be worth $14,558 today.
3 High-Dividend Stocks to Buy Now, #2: Hugoton Royalty Trust (HGT)
Dividend Yield (ttm): 12.4%
Shelf Life of Trust: Roughly 8.5 years
Production Mix: 6% oil/94% gas
Note that the Hugoton Royalty Trust (HGT) has a vastly different production mix than BPT. When you’re hunting around looking for the best dividend stocks to buy, you consider the line of business you’re investing in. In the same vein, you should be mindful of which natural resources you’re counting on to drive returns in a royalty trust.
That’s important to remember because, as with any investment, royalty trusts have non-zero risk; you can lose your shirt betting the wrong way on a royalty trust just like you can take a bath if you pick all the wrong dividend stocks to buy.
HGT itself is a fine example. Rights to natural gas and oil properties in Kansas, Oklahoma, and Wyoming were worth a heckuva lot back in 2008, when HGT peaked above $21 per share as commodities prices hit multiyear highs.
Given that HGT was trading below $3 per share 15 years ago, that was a nice return. But today, as the assets have depleted and with energy prices in the dumps, HGT is back below $3 again.
Still, if you believe in comeback stories — and more importantly, rising oil and natural gas prices — HGT should be a huge beneficiary.
3 High-Dividend Stocks to Buy Now, #3: Permian Basin Royalty Trust (PBT)
Dividend Yield (ttm): 6.4%
Shelf Life of Trust: Roughly 16 years
Production Mix: 66% oil/33% gas
Permian Basin Royalty Trust (PBT) is another high-yield royalty trust with a payout most solid dividend stocks can only dream about.
PBT, like Prudhoe Bay, has also absolutely clobbered the markets over the last 15 years, boasting a total return of 330% to the S&P’s 45%. With a fairly diversified production mix and an estimated “shelf life” (how many more years of production are left) of about 16 years, PBT could be an outperformer for years to come.
Another interesting thing about royalty trusts that you don’t see in dividend stocks: The natural resource rights you own are only worth something until you tap them out, right? Well, when the wells dry up at the end of its life, royalty trusts sell the remaining land and distribute the proceeds from that sale to investors.
In many cases, that final sale can fetch some meaningful dough — yet another reason to consider adding investments like this to your portfolio.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.