Stock selections for energizing income

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Updated: January 31, 2012 11:48AM

Making your money work harder is sometimes a matter of drilling a little deeper.

For those interested in energy stocks, it’s not hard to find some that are reliable income producers in the form of dividends. Big Oil is especially good for this.

ConocoPhillips (COP) pays a dividend yield of 3.8 percent, while Chevron (CVX) checks in at 3.1 percent. BP (BP) and ExxonMobil (XOM) offer 2.4 percent, which in any case looks better than what the local bank will offer in a CD.

But you can exploit the world’s oil thirst for more income. The best example may be SeaDrill (SDRL), which specializes in deepwater rigs. It goes where the conditions are forbidding and the work is expensive, but its expertise has made it an increasingly important partner for Big Oil.

And it pays its investors well. The current annualized dividend of $3.135 per share works out to a yield of about 9 percent. Its payouts have fluctuated the last few years because its income is volatile, but the records show SeaDrill always has provided a decent yield.

Oil companies increasingly must explore in the globe’s most remote locales. Analyst Jeff Reeves, editor of InvestorPlace.com, wrote that Exxon has forged an agreement with a state-owned company in Russia to work in harsh northern climates.

Reeves said SeaDrill’s expertise compares favorably with deepwater drillers Halliburton (HAL) and Transocean (RIG), still dealing with the impact of its Gulf Coast disaster.

A search also will turn up several other promising dividend stocks in energy. Consider Cheniere Energy Partners (CQP), Enerplus (ERF) or PennWest Petroleum (PWE).

Cheniere transports and stores natural gas, and it’s paying 10 percent. The other two are Canadian companies. Their dividends pay you for patience while the oil sands debate plays out.

COAL IN YOUR STOCKING: Despite the environmental concerns, coal is still a fairly cheap energy source and is likely to be in demand by the developing world. China, for example, has massive coal reserves but trouble getting to it, so it has become a major importer.

A report by Zacks Investment Research finds investment opportunities in coal, especially if you concentrate on companies that sell to the Asian markets. Zacks analysts like Peabody Energy (BTU), Consol Energy (CNX), James River Coal (JRCC) and Cloud Peak Energy (CLD). Investors look at these companies for appreciation and not income.

As for master limited partnerships, the tax-advantaged and dividend-rich businesses that deal mostly in energy, the report mentions as good investment bets Penn Virginia Resource Partners (PVR), Natural Resource Partners (NRP) and Alliance Resource Partners (ARLP).

Coal has been getting competition from natural gas, which is cheaper, but in turn it is squeezing out petroleum, also on the basis of cost.

PICKS AND PANS: Investors scouting tech stocks should check out Canaccord Genuity’s recommendations on what to take and what to avoid.

The stocks Canaccord analysts like include: Analog Devices (ADI), Integrated Device Technology (IDTI), Apple (AAPL), Qualcomm (QCOM), Sierra Wireless (SWIR), Saleforce.com (CRM), Google (GOOG) and Zillow (Z). The analysts have a favorable view of trends in smartphone sales and online advertising, along with a belief that more people will use social networks.

Where’s the trouble? Canaccord said it’s in Intel (ITC), LM Ericcson (ERIC), Research in Motion (RIMM), Powerwave Technologies (PWAV), Netflix (NFLX) and Intuit (INTU).

MIND YOUR MUNIS: Several deficit reduction proposals in Washington have suggested ending the tax exemption for municipal bonds. It’s one of those recurring ideas on Capitol Hill, like the futures transaction tax, that never go anywhere, except that panic over federal debt could lead some to take the proposal seriously.

That’s clearly a concern for Chicago-based Bernardi Securities, a broker-dealer for munis, which prepared a report arguing for their continued tax-exempt status.

President Ronald Bernardi said the muni exemption is a low-cost, high-benefit proposition. As a drain on tax coffers, it’s only about 25 percent of the cost of the home mortgage tax deduction, yet it helps local governments create jobs from public works.

Repealing the exemption also would result in substantially less revenue than the government estimates, Bernardi said, because investors would adjust portfolios accordingly.

Government has a habit, however, of discounting the unintended consequences.

CLOSING QUOTE:
“[W]ith all this fear generated by Europe, something remarkable has been developing in the U.S. An economic foundation has slowly been building despite the miserable news overseas. … [C]onsumer confidence had its sixth biggest jump ever and its largest in eight years; that jump, eight years ago, saw markets stage an impressive four-year rise.”

— Stephen Mack,
Glenview-based Mack
Investment Securities