The Most Promising Dividends in Oil Refining

Dividend payers deserve a berth in any long-term stock portfolio. But seemingly attractive dividend yields are not always as fetching as they may appear. Let's see which companies in the promising oil refining industry offer the most promising dividends.

Yields and growth rates and payout ratios, oh my!
Before we get to those companies, though, you should understand just whyyou'd want to own dividend payers. These stocks can contribute a huge chunk of growth to your portfolio in good times, and bolster it during market downturns.

As my colleague Matt Koppenheffer has noted: "Between 2000 and 2009, the average dividend-adjusted return on stocks with market caps above $5 billion and a trailing yield of 2.5% or better was a whopping 114%. Compare that to a 19% drop for the S&P 500."

When hunting for promising dividend payers, unsophisticated investors will often just look for the highest yields they can find. While these stocks will indeed pay out the most, the yield figures apply only for the current year. Extremely steep dividend yields can be precarious, and even solid ones are vulnerable to dividend cuts.

When evaluating a company's attractiveness in terms of its dividend, it's important to examine at least three factors:

  • The current yield

  • The dividend growth

  • The payout ratio

If a company has a middling dividend yield, but a history of increasing its payment substantially from year to year, it deserves extra consideration. A $3 dividend can become $7.80 in 10 years, if it grows at 10% annually. (It will top $20 after 20 years.) Thus, a 3% yield today may be more attractive than a 4% one, if the 3% company is rapidly increasing that dividend.

Next, consider the company's payout ratio, which reflects what percentage of income the company is spending on its dividend. In general, the lower the number, the better. A low payout ratio means there's plenty of room for generous dividend increases. It also means that much of the company's income remains in its hands, giving it a lot of flexibility. That money can fund the business's expansion, pay off debt, buy back shares, or even buy other companies. A steep payout ratio reflects little flexibility for the company, less room for dividend growth, and a stronger chance that if the company falls on hard times, it will have to reduce its dividend.

Peering into petroleum refining
Dividend investors typically focus first on yield. Calumet Specialty Products Partners and BP Prudhoe Bay Royalty Trust (NYS: BPT) are among the highest-yielding stocks among oil refiners, recently offering 9.4% and 8.7%, respectively. But they're not necessarily your best bets. Calumet's payout ratio is a huge 297%, while BP Prudhoe Bay's is 100%. The latter's dividend growth rate is anemic, as well, at roughly 1% over the past five years. Still, you might consider BP Prudhoe Bay just for the hefty dividend alone, noting that it's a royalty trust with special tax considerations. It holds a stake in one of Alaska's largest oil fields, and has been a top performer over the past decade.

If we focus on the dividend growth rate first, Suncor Energy (NYS: SU) leads the way, with a five-year average annual dividend growth rate of 26.5%. That growth rate is so steep, though, that it will be hard to maintain for long. Its low payout ratio of 21% makes that far from an immediate concern, but with its current yield near 1.4%, it will take awhile to reach an attractive level. Valero Energy (NYS: VLO) , meanwhile, has a 13.4% dividend growth rate over the past five years, and a recent yield near 3%. In its third quarter, it posted operating profits up almost 300% over year-ago levels, as it expands its capacity and also expands its international operations.

Marathon Petroleum (NYS: MPC) is also intriguing. With a current yield near 3%, its dividend is new, since the company only recently split off from Marathon Oil, but the dividend increased by 25% just in 2011. Marathon has been upping its crude-oil processing capacity, and has benefited from higher gross margins in refining.

Just right
As I see it, Statoil (NYS: STO) offers the best combination of dividend traits, sporting some solid income now and a good chance of strong dividend growth in the future. Its yield was recently 3.6%, with a payout ratio of just 31%. Its dividend has been a bit lumpy in recent years, but last experienced an increase, and as long as the company performs well, it's likely to keep growing. Statoil's future seems promising, following its $4.4 billion purchase of Bakken shale player Brigham Exploration and a major discovery in the North Sea region. It also renegotiated lucrative leases in the Gulf of Mexico.

Of course, as with all stocks, you'll want to look into more than just a company's dividend situation before making a purchase decision. Still, these stocks' compelling dividends make them great places to start your search, particularly if you're excited by the prospects for this industry.

Do your portfolio a favor. Don't ignore the growth you can gain from powerful dividend payers.

Looking for someAll-Star dividend-paying stocks? Look no further.

At the time thisarticle was published Longtime Fool contributorSelena Maranjianholds no position in any company mentioned.Click hereto see her holdings and a short bio.Motley Fool newsletter serviceshave recommended buying shares of Statoil. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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