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If you’ve been looking for income in the energy space, you haven’t had a problem finding it.
The Alerian MLP ETF (NYSEArca: AMLP) is paying out a 9.4% distribution yield. However, that income has been far from “safe.” To get the $1.06 a unit annual distribution, you would have suffered through a nearly $7 fall in the share price over the last year.
Not all income is created equal. High dividend yields aren’t everything. For the best energy stocks, it’s more about stability and the companies’ ability to keep paying dividends.
Many companies have seen their stocks slammed because they are tied to oil. However, there are pockets of the energy space that are relatively safe for income investors. The key is to steer clear of certain industries when looking for dividends. Those exploring and drilling for oil and gas are some of the most vulnerable to dividend cuts.
But the companies that make equipment for the energy industry and actually transport the oil and gas are where the real value is.
With all that in mind, here are the best energy stocks for income investors in 2016:
1. Schlumberger (NYSE: SLB)
This oil and gas equipment company is offering a 2.7% dividend yield and has held up much better than other energy plays; it’s only down 10% year-to-date. It also has a strong balance sheet, which should ease fears of dividend cuts.
I’ve talked about the opportunity that’s presenting itself with the merger of a couple of Schlumberger peers, Halliburton (NYSE: HAL) and Baker Hughes (NYSE: BHI), but for income purposes, and more stability, Schlumberger is the best play.
It’s the market leader and generates more than 50% of its business outside the U.S., so it’s not as exposed to the volatility from fracking. It’s also considered the tech leader in the field and has strong relationships with major oil producers.
2. Magellan Midstream Partners (NYSE: MMP)
Magellan Midstream has close to 10,000 miles of oil and gas pipelines. (For a good primer on the benefits of operating in the midstream oil and gas sector, click here.)
I’ve talked about Magellan Midstream Partners in the past as a solid income play, yet it’s a baby that’s still being thrown out with the bathwater, so to speak – although not as bad as some. The Alerian MLP Index is off 34% over the last year, while Magellan Midstream is down 22%. Magellan’s distribution yield is over 5%.
The beauty of Magellan Midstream’s business model is that it is largely fee-based. It gets paid on the oil and gas it moves, rather than the price. About 85% of its operating income is generated via fee-based storage and transportation activities.
Without a parent company like most MLPs, Magellan has no incentive distribution rights. This keeps its cost of capital lower and means more distribution growth for investors.
3. Spectra Energy Corp. (NYSE: SE)
Spectra Energy Corp. runs a master limited partnership, Spectra Energy Partners LP (NYSE: SEP), which I’ve called one of the best high yield MLPs in the space.
But it’s time to look at the parent company, Spectra Energy Corp., which has dropped down many assets to its MLP. That should allow it to plow money into funding future growth while other midstream players are just trying to maintain their dividend.
Again, with MLPs and related midstream players, it’s all about the fees they generate. Unlike Magellan Midstream, Spectra focuses on natural gas and has fixed-fee long-term contracts that provide cash flow.
Investing when others are fearful is hard. Having some dividend income helps. The three stocks above have been hit by fear, but have stable dividends and solid business models to ride out the current down cycle in energy.