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A Look At Some Goings On Among Energy Sector Dividends - High-Yield Dividend Investing Commentary Dec. 14, 2009
Jim Trippon, CPA

The energy sector is one we're constantly looking at in an effort to find solid dividends and we're usually rewarded for our efforts.

Given the wide swath of companies that can be considered "energy plays," it's not hard to find robust payouts and yields in the energy arena and that explains we remain big fans of the energy patch for dividend seekers. That said, things aren't always rosy in the energy sector when it comes to dividends and that's why you regularly monitor the sector for possible changes among its dividends.

For example, a recent analyst report from Johnson Rice & Co. highlighted some of the problems currently facing companies in the oil services sector. The performance of these stocks is intimately correlated to the price of crude oil and with crude prices currently languishing below $70 a barrel, Johnson Rice cut its ratings on several oil services stocks, including Diamond Offshore (NYSE: DO).

To be sure, Diamond Offshore is no dividend diva. The company pays a dividend of just 50 cents a year, good for a current yield of just 0.5%. Diamond Offshore has paid several special dividends over the years and recently declared a $1.875 special dividend.

Unfortunately, the Johnson Rice report extolled a bearish view on midwater drilling and jack-up rates in 2010 and mentioned Diamond Offshore as a candidate for a dividend cut.

Another energy name that could see some dividend problems is natural gas pipeline and production firm El Paso (NYSE: EP). Again, the dividend isn't strong to begin with at just four cents a share per year (yield of 0.4%), but the company said it will raise its 2010 spending by 30% to $4.1 billion to cover order backlogs.

With $13 billion in debt, El Paso will spend more than its cash flow from operations, leaving some analysts to wonder how the company will account for any shortfall. It is worth noting that there have been no talks of a dividend cut. After all, El Paso's dividend isn't big enough to pare in the first place, but we advise keeping an eye on El Paso's cash situation before throwing money into the name.

Next we have the case of Italian oil giant Eni (NYSE: E). Eni has been a good dividend payer on a historical basis, but in July the company pared its dividend to 0.15 euros from 0.50 euros per share. Eni is the most leveraged of the European oil majors and the company has been shedding non-core assets to raise cash.

But some analysts fear strategic assets may have to go on the block as well to fund growth and maintain a decent dividend policy. Eni's debt-equity ratio was 42% at the end of September, up from 38% a year earlier and with dwindling profits and slumping crude prices, it's hard to endorse a position in Eni at this point.

Want some good dividend news from the energy patch? Check out steady utility Edison International (NYSE: EIX), which recently boosted its annual dividend to $1.26 a share from $1.24 a share. Edison currently yields 3.4%, a fair bit above its five-year average of 2.9%.

This is the seventh straight year of dividend increases from Edison International, so yes, boring can be beautiful when it comes to finding dividends.



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