Finding the Best Energy Dividend Stocks for Your Portfolio

The energy industry can help provide a hedge against inflation, and top energy dividend stocks offer current income—as well as a history of success and modern technology for future growth.

Energy dividend stocks can play a role in your portfolio as a hedge against inflation, and a source of current income, but you must select carefully.


When to trust your dividends

“One of the best ways to judge whether a company will keep paying its dividend, or even increase it, is the dividend payout ratio. This simply measures what portion of a company’s earnings are allotted to paying dividends. If a company keeps its payout ratio fairly steady, say at 7% of earnings, and its earnings grow…”
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How to find the best energy stocks for your portfolio

While choosing energy stocks, look for well-financed companies with no immediate need to sell shares at low prices. These stocks typically have strong balance sheets with manageable debt.

When we choose stocks in our newsletters, we also look for an experienced management team with a proven ability to develop energy reserves. Likewise, we make sure they don’t have significant operations in any insecure or politically unstable regions.

Furthermore, it’s best to avoid any energy stocks that trade “over the counter,” where such things as regulatory reporting are lax. And we don’t invest if the stock is trading at an unsustainably high price, because that price is likely the result of broker hype or investor mania.

We also look at the market cap of energy stocks versus the estimated value of the reserves they have in the ground. Sometimes, a company’s marketing efforts are so successful that they drive the stock up too high in relation to the size of its reserves. We like an energy stock’s market cap to be no more than half the value of those reserves. We assume that the company will be able to expand its reserves through exploration, but if the reserves are double the energy mining stock’s market cap, it provides a margin of safety.

Successful energy stocks also pioneer technological advances. For instance, recent advances in oil and gas drilling technology helped bring huge new supplies of oil and gas on the market. The new technologies made it possible to vastly increase oil and gas production, even from deposits that were once considered worthless.

The value behind energy dividend stocks

We’ve always placed a high value on a record of dividends, mainly because it provides something of a pedigree for stocks we recommend. After all, you can’t fake a record of dividends. It takes a lot of success and high-quality management for a company to have the cash and the determination to declare and pay a dividend every year for five or 10 years. It’s not something you can create at the spur of the moment.

Above all, for a true measure of stability, focus on stocks that pay a dividend they’ve maintained or raised during economic or stock-market downturns. That’s because these firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they also provide an attractive mix of safety, income and growth.

A track record of dividend payments is a strong sign of reliability and a sound indication that investing in the stock will be profitable for you in the future.

Furthermore, the top dividend-paying stocks to invest in have strong positions in healthy industries. They also rely on strong management to make the right moves to keep them competitive in changing marketplaces.

The top energy dividend stocks also have the following 7 characteristics:

  1. They provide regular income from dividends
  2. They are one of the dominant firms in an industry
  3. They feature hidden assets such as research spending
  4. They are on high-quality, proven companies
  5. They operate a well-established business
  6. They have strong management
  7. They have manageable debt

Use our three-part Successful Investor philosophy when you select energy dividend stocks

Resource and commodity stocks in general should make up only a limited portion of your portfolio. And as part of that segment, energy stocks could make up, say half of that total. The rest could be fertilizer stocks, mining stocks and so on.

Maintaining an investment in energy stocks can be part of our fundamental investment approach to building a well-balanced portfolio. Our approach is grounded in our three-part investing program. This approach forms the core of all the advice you get in our newsletters, and on TSI Network.

Principle 1: Invest mainly in well-established, dividend-paying companies.

When the market goes into a lengthy downturn, these stocks generally keep paying their dividends, and they are among the first to recover when conditions improve.

Principle 2: Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities).

This helps you avoid excess exposure to any one segment of the market that is headed for trouble. Diversifying across the five sectors will also dampen your portfolio’s volatility in the long term, without the potential shrinking that you’d get if you invest significantly in bonds yielding little more than, say, 4%.

Principle 3: Avoid or downplay stocks in the broker/media limelight.

That limelight tends to raise investor expectations to excessive levels. When companies fail to live up to expectations, these stocks can plunge. Remember, when expectations are excessive, the occasional failure to live up to them is virtually guaranteed, in the long term if not in the short.

These three investing philosophy principles guide us in every portfolio we manage. Using these principles will help protect your money during periods of market turbulence, and help you profit when the market rises.

Energy stocks may have hidden liabilities due to growing environmental concerns. What area of the resource sector do you focus on and how do you protect against these liabilities?

How much have you moved to limit the percentage of your portfolio dedicated to energy stocks?

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