Now all these stocks are exposed to the oil and gas sector, an industry that's taken a hard hit lately as commodity prices have come down. They could go even lower if the trend continues. So investors need to keep this in mind if they try Cramer's strategy. But regardless, this doesn't necessarily mean that the dividends the companies aren't safe.
These aren't the kinds of stocks investors want to trade. They're investments for the dividend. And there's even a chance that an initial purchase of these stocks could lose some of its value as market conditions push down their share prices. But the dividend is what matters here, Cramer said, so that's what investors should focus on. Can the dividend be paid? How much will it be? Is it safe?
Permian Basin and Linn Energy pay out 11.7% and 16.3%, respectively. But because they're both producers of oil and gas, those dividend yields will vary with the commodities' prices. The lower they go, the less these firms pay out.
There are differences between the two, though. PBT is a U.S. royalty trust, so it doesn't develop new oil and gas properties. But PBT's production rate is declining at just 2% a year versus the industry average of 8%. So PBT isn't about to go out of business. And that consistency means that PBT's yield is a bit more dependable. Of course, there's no growth here, and the dividend is still dependent on the price of oil and gas.
Linn's a bit different. It's a exploration master limited partnership, so its primary function is to seek out new properties. Granted, that exposes investors to some risk, but Cramer said Linn has a nice cushion of cash to ensure the dividend if the suffers a discovery dry spell. And the cash also insulates the dividend against fluctuating oil and gas prices.
Unlike PBT, Linn's exploration business offers investors growth opportunities. But bottom line is that these are oil and gas stocks, and if the sector dips, so will they. That means the share price will go down, and as a result, so will the yields. So be aware that there's real downside risk here.
Enterprise Product Partners and Kinder Morgan Energy Partners operate at a different level. They don't produce oil and gas, and they transport it via pipelines. While their yields are lower, 8.2% and 7.7%, respectively, they're less volatile because the price of oil and gas doesn't necessarily affect what EPD and KMP charge their customers. Sure, the overall decline in the energy cohort has had an affect on these two stocks, but Cramer said that because both companies are expanding their dividends aren't threatened. So while there's a chance investors could lose money on the stock, the payout should be dependable.
How would Cramer play this? He recommended KMP or EPD for investors looking for safety and stability. For those looking for a higher yield, albeit riskier, he said he likes Linn over PBT because there room for Linn to catch up with its peers and the dividend is less dependent on oil and gas prices.
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