Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. See last week's selection here.
This week, we're going to turn to an area that's usually very quiet but has been a hot spot for volatility lately -- oil and gas royalty trusts -- and I'll show you why BP Prudhoe Bay Royalty Trust (NYS: BPT) could be the pick of the litter.
Oil is quite a gas for your portfolio
First, let's start with some quick background on trusts. Trusts aren't set up like your typical company: They have no employees and their profits aren't taxed at the corporate level in return for distributing upward of 90% of their net income to their shareholders in the form of a dividend. Trusts merely own an operating interest in oil and natural gas properties.
In BP Prudhoe Bay's case, its estimated net proven and probable reserves as of the end of last year was 82.3 million barrels, of which nearly 90% is proved and developed resources. The trust is owned by BP (NYS: BP) , as the name would imply, and, according to BP's annual filings, has enough resources to pay out quarterly stipends to shareholders at least through the year 2024 (and perhaps even longer), with a declining rate of production until 2062.
BP Prudhoe Bay shareholders and prospective shareholders should understand that the company has two major factors pointed decisively in its favor.
First, its primary resource is oil, not natural gas. With oil remaining a more in-demand resource that commands a higher price point, that means near-guaranteed profits for the trust, and thus, juicy dividend payments for its shareholders. The same can't be said for San Juan Basin Royalty Trust (NYS: SJT) and Hugoton Royalty Trust (NYS: HGT) , whose shareholders have suffered big losses in recent weeks after the true value of the trusts has been questioned given the steep fall-off in natural gas prices over the past two years.
Second, it has guaranteed reserves that will last at least another 12 years. The company's profit margin of 99.4% assures that investors are seeing the maximum possible return on their investment with minimal overhead. Owning BP Prudhoe Bay also gives investors a way of indirectly playing the part of oil market without actually owning oil itself; and you get to collect a dividend to boot!
Finally, there's the amazing dividend, which should provide investors with a complete payback long before the trust's reserves run dry.
As you can see from the chart above, at no point over the past 10 years has this trust's dividend yield dipped below 7%! Even at its low point, BP Prudhoe Bay would have delivered a complete dividend payback in roughly 10 years. With an average yield much closer to 10%, those investors who have held over the long haul have been rewarded with a complete payback in just over seven years with everything on top of that move being gravy.
Here's a quick rundown of BP Prudhoe Bay's payment history to shareholders. Note: You may want to have a drool rag handy.
Source: Dividata. *Author's estimated 2012 dividend payment based on Q1 and Q2 distributions.
Now aren't you glad you had that drool rag on standby? In addition to benefiting from ridiculously high dividend yields, investors have also been privy over the past decade to a huge run-up in oil prices. Taking into consideration both dividend payments and share-price appreciation since Jan. 1, 2002, shareholders currently holding since that date would be up a staggering 2,263%!
Before you click the "buy" button...
Now understand that royalty trusts don't completely come without risks attached.
We've already touched on one: Trusts can only operate for a finite amount of time. Clearly, as that 2024 date gets in much closer view, BP Prudhoe's share price could be adversely affected. In addition, the infrastructure currently in place to drill and transport the oil in the Prudhoe Bay region wasn't built to last longer than 25 years. With much of the drilling already past that point, it shouldn't come as a surprise to anyone if we had a repeat of what happened in 2006 when BP completely shut down its operations at Prudhoe Bay to replace corroded portions of its pipeline.
Still, with all risks considered, there really isn't another oil and gas trust out there that's been more profitable for its shareholders than BP Prudhoe Bay. It's a smart play on a necessary product that allows investors to profit off the oil boom while also collecting a top-tier dividend. I suspect there's still another 10 good years of strong growth left in this trust from both share appreciation and dividends, and I encourage income-seeking investors to give BP Prudhoe Bay another look if they haven't already.
If you're craving even more dividend ideas, I invite you to download a copy of our latest special report, "Secure Your Future With 9 Rock-Solid Dividend Stocks," which is loaded with income-producing companies hand-selected by our top analysts. Best of all, this report is free, so don't miss out!
At the time thisarticle was published Fool contributor Sean Williams has no material interest in any of the companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that has endless reserves of transparency.
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