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Tickers in this Article: ECA, PWE, PGH, PVX, PSE, DUK, CNP
Annual dividend payments account for approximately $10 billion worth of income to investors, a value which is expected to move higher as more S&P 500 companies increase their payouts. However, before investing into a high-yield stock, investors must look beyond the dividend yield and analyze the fundamentals of the specific company and its industry.

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Is a High Yield Always Better?

BP currently yields 7.2%. Although this might seem attractive initially, the controversy surrounding Gulf of Mexico oil spill has resulted in a capital loss of nearly 25%, erasing $45 billion of the company's market cap as momentum continues downward.

On the other hand, EnCana (NYSE:ECA), which offers a much smaller dividend of 2.50%, has maintained a stable share price despite falling prices of natural gas and oil. Canada's largest natural gas producer continues to expand its operations, drilling 448 net wells last quarter and estimates 2010 capital spending of $4.5 billion. While EnCana generates enough cash flows to increase their reserves and pay dividends to investors, BP will be plagued with clean up costs and lawsuit settlements.

Royalty Trusts

Canadian royalty trusts (CANROYs) have historically been known to offer high dividend payouts. In contrast to other North America trust structures, CANROYs are not subject to income taxes on distributions made to unit holders. The double taxation issues which reduce the value of declared dividends are mitigated by the current tax code in Canada. Provident Energy Trust (NYSE:PVX), Penn West Energy Trust (NYSE:PWE) and Pengrowth Energy Trust (NYSE:PGH) supply impressive dividend yields of 9.6%, 9.3% and 8.4% respectively.

Unfortunately, the favorable tax treatment for CANROYs will be removed in 2011. Due to fears that the government was losing significant amounts of tax revenue, trusts will be taxed in the same fashion as corporations.

Dividends in Oil

Oil production costs in Alberta tend to be higher than in other parts of the world, with break-even points estimated to be approximately $55. Therefore, when oil prices dipped below $40 a barrel in the January of 2009, many Canadian energy companies were not able to sustain profitable business operations; large projects had to be put on hold and mass layoffs ensued. If the current downward trend in oil persists, Canadian producers may struggle to generate enough operating cash flows to fund expansion and desired dividend payouts.

Pioneer Southwest Energy (NYSE:PSE) incurs production costs of $21.16 per BOE. Therefore, even in the event that oil and gas prices recede further, it will be able to sustain its 8.7% dividend yield. In July 2008 PSE paid a dividend of $0.31; in the following seven quarters a steady dividend of $0.50 has been distributed. In contrast, Provident Energy Trust paid a $0.122 dividend in March 2008 which decreased to $0.049 one year later (note that Provident pays monthly dividends). Although Canadian royalty trusts typically pay hefty dividends, their payouts tend to be more closely correlated with the price of oil, and thus more volatile.

Safety in Utilities

An important criterion in choosing an ideal dividend paying stock to add value to your portfolio is the requirement of dividend sustainability. Some firms have attractive yields, but their payout policies cannot be maintained indefinitely. Utility companies however, have adopted business models which should ensure that they will be able to make the necessary payouts to shareholders. Notably, Duke Energy (NYSE: DUK) and CenterPoint (NYSE:CNP) are low-risk stocks which yield 5.70 and 5.50% respectively.

The Bottom Line

Dividends are an important part of an investment portfolio. However, there is more than just a single metric to consider when choosing the right investment.

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