Get Paid While You Wait: 3 Top Dividend Stocks in Oil

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Oil stocks have long been an interesting place to look for dividend income, and the energy industry got even more interesting after oil prices took a nose dive in mid-2014. With oil still down from its highs but staying above the $50 a barrel range recently, now is a great time to reexamine the sector looking for top dividend stocks. If you like to get paid while you wait, ExxonMobil (NYSE: XOM), Magellan Midstream Partners, L.P. (NYSE: MMP), and ONEOK, Inc. (NYSE: OKE) are great stocks to look at today.

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A giant value

Exxon is one of the largest integrated oil majors in the world, with businesses spanning from drilling for oil and gas to processing and delivering it to end customers. Historically it has been one of the best run companies, with its return on capital employed routinely near the top of its peers. In other words, it puts its investors' money to good use.

Exxon's balance sheet, meanwhile, is highly conservative. The energy giant's debt to EBITDA ratio has historically been at the low end of its group. That's true even though the oil major increased its debt during the energy downturn to support its dividend and capital spending. That spending helped the company reduce its break even point, so it can better compete in a low oil price environment, and, equally important, Exxon has pivoted toward debt reduction at this point. Its streak of annual dividend increases, meanwhile, is also now up to 35 years. This is exactly the kind of dividend payer that will pay you well to stick around.

But at 3.7% it's not the highest yielding oil major, so why even look at it? The reason is that, unlike most peers, Exxon's price to tangible book value is near its lowest levels of the last decade. This statistic suggests that, based on its history, Exxon is extremely cheap today. In fact, it might be the best value of the oil majors. And you'll get paid to wait for other investors to figure that out. 

Growing fast in the right place

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Magellan Midstream Partners is a large oil and natural gas midstream partnership. It helps get these vital energy sources from where they're drilled to where they get used via its pipelines and storage facilities. The vast majority of its business is fee-based, so the price of oil and natural gas has little impact on its business -- demand for energy is more important.

The partnership yields around 5.3% today. Like Exxon and its oil major peers you can find midstream companies with higher yields. But Magellan happens to be one of the most conservatively run oil and gas midstream players, with debt to EBITDA at the low end of the group. And it has an amazing history of distribution hikes, currently spanning 17 years, including a hike every quarter since it went public in 2001.

This conservative partnership pays you to own it, and there's no reason to doubt that it will stop. But the most exciting thing about Magellan is its distribution growth. Over the past decade the annualized distribution increase was 11%. It's currently targeting 8% over the next few years, which is well over twice the historical growth rate of inflation. Sure, you can get higher yields, but the mix of safety and distribution growth here is top-notch.

Another way to play

Magellan is a partnership, which comes with some tax complication (partnerships don't play well with IRAs, for example). That's why you might want to take a look at ONEOK, a traditional corporation that works in the midstream space. It currently yields around 5.6% and has a 15-year streak of annual dividend increases.

It's an interesting time in ONEOK's history, because the company just bought its controlled limited partnership. That should reduce its cost of capital, which will help it grow its business in the future. However, debt is higher than management would like, with a debt to EBITDA ratio at around 5.1. The plan is to push that down into the 4 times range, near Magellan's debt to EBITDA levels. There are a lot of moving parts right now, including paying down debt, investing in the business, and supporting continued distribution growth.

However, with a yield that's well more than twice what you'd get from an S&P 500 Index fund, you'll be paid well to wait for management to work its way through this period. And when it's done, you're likely to be very happy you stuck around. That's particularly true since management plans to grow the dividend by as much as 11% a year through 2021.

More than just a yield

Exxon, Magellan, and ONEOK are not the highest yielding oil investments around, but they offer a mix of yield and safety that suggests you'll keep getting paid no matter what happens in the energy space. And each has positive attributes that dividend investors should love, like Exxon's valuation and strong balance sheet, Magellan's conservative finances and distribution growth prospects, and ONEOK's efforts to shift its business to a lower cost and leverage profile, while still providing double-digit dividend growth.

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Reuben Gregg Brewer owns shares of ExxonMobil. The Motley Fool owns shares of and recommends ONEOK. The Motley Fool recommends Magellan Midstream Partners. The Motley Fool has a disclosure policy.