Look To Energy For High Dividends

With the markets returning to their up-and-down patterns circa 2008, many investors are turning to dividends as way to ride out the storm. Overall, investors have placed nearly $12.6 billion into dividend-related stock ETFs like the iShares Dow Jones Select Dividend Index (NYSE:DVY) this year. Most of that interest and money has gone to traditional dividend-paying sectors such as healthcare and utilities. However, one sector of the market, which is generally thought of as a growth element, can provide income opportunities as well. For investors, given the sector's rosy long-term picture and recent sell-off, now could be the time to strike. (For a complete breakdown of ETFs, check out our tutorial on Exchange-Traded Funds.)

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights

Income from the Wellhead
For those investors looking for dividends, the overlooked energy sector could be a real gusher. With many analysts still pointing to strong inflationary pressures in the years ahead, commodities are seen as the perfect way to add protection against these stresses. After all, inflation hits most of us in the food we eat and energy we consume. Secondly, the long-term demand for fossil fuels remains intact. Driven by new sources of demand in the emerging world, the Energy Information Administration (EIA) estimates that total worldwide energy consumption will increase 49% by 2035. This rising demand, despite new drilling technologies, will ultimately drive up prices and bottom lines at energy companies. The strong dividend payers in the sector will only get stronger.

However, finding those yields can be difficult. The broad-based Energy Select Sector SPDR (NYSE:XLE) currently only yields a paltry 1.39%, and many exploration and production (E&P) firms don't pay dividends at all. Luckily, there are several ways for portfolios to get their hands on some energy dividends, and because investors generally focus on the growth prospects for the sector, many of these income opportunites are often ignored and trade at discounts. Here are some ways to add that much-needed income.

Foreign Majors
International firms commonly are much more generous when it comes to paying dividends, and that holds true for the international energy sector as well. The SPDR S&P International Energy ETF (NYSE:IPW) tracks 77 different international energy firms and currently yields 2.5%. In addition, Italian energy giant Eni SpA (NYSE:E) has fallen hard over the last weeks, as revolution in Libya has hurt its operations there. But given Gaddafi's recent ouster, the company is ready to begin pumping again. Eni yields 5.5%. (For more on dividends, read Why Dividends Matter.)

The Royal Treatment
United States Royalty Trusts generate dividend income from the development of natural resources such as coal, natural gas and crude oil. Strictly finance vehicles with no production operations, cash flows are subject to the prices of the underlying commodity and are paid out to unit holders. E&P firm SandRidge Energy (NYSE:SD) recently sold interests in two of its producing regions. The SandRidge Mississippian Trust (NYSE:SDT) recently began paying dividends and currently yields 9.73%. Investors can expect similar results from its new sister trust, the SandRidge Permian (NYSE:PER). For those investors who want a more established dividend play in the Permian region, the Permian Basin Royalty Trust (NYSE:PBT) pays a 6.38% monthly dividend.

Pipeline Profits
One of the more interesting ways to play the energy market is to focus on companies that provide the vast energy infrastructure crisscrossing North America. Pipeline and terminal operators' profit is based on the volume flowing through their pipes, not on what that liquid is worth, so investors can ignore the price swings of fossil fuels. The JPMorgan Alerian MLP Index ETN (NYSE:AMJ) provides a great overview of the sector and currently yields a healthy 5%. Similarly, investors can bet on Kinder Morgan Energy Partners (NYSE:KMP) and Energy Transfer Partners (NYSE:ETP), which represent two of the strongest operators in the sector.

The Bottom Line
With the markets continuing to show returned volatility, dividend investing is back in style. However, many investors still ignore the opportunities in the energy sector. With strong long-term growth prospects, the sector should be on every investor's radar. The previous stocks, along with Linn Energy (Nasdaq:LINE), make ideal picks. (To help you add dividend-yielding stocks to your portfolio, read Build A Dividend Portfolio That Grows With You.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!