It’s been a while since we’ve seen oil prices at current levels. Specifically, the WTI and Brent oil prices are at about US$64 and $71 per barrel, respectively.
Here are two top dividend stock gems that should benefit from higher oil prices. Both Pason Systems (TSX:PSI) and Vermilion Energy (TSX:VET)(NYSE:VET) have miraculously maintained or increased their common stock dividends every year since 2003 — throughout the financial crisis of 2007-2008 and the oil price slump of 2014.
Additionally, both stocks have increased their dividends within the last 12 months.
Let’s dig a little deeper into each dividend stock gem.
Pason Systems’ history goes as far back as 1978. It eventually worked its way to become a public company in 1996. Last year, it generated $306 million of revenue and net income of just under $63 million.
It achieved an industry-leading net margin of 20.5%, beating the industry average of 2% by a country mile. What’s more impressive is that it has achieved all that with no debt on the balance sheet.
Pason Systems provides specialized data management systems for drilling rigs. Its solutions include data acquisition, well site reporting, remote communications, and web-based information management. The solutions conveniently allow for collaboration between the rig and the office.
In other words, the company provides equipment and technology solutions for oil and gas producers with leading market positions in North America, South America, and Australia.
Higher oil prices should lead to increasing activities at the oil patch, which should, in turn, lead to more usage of Pason Systems’ products and services.
At $20.71 per share as of writing, Pason Systems is good for a yield of about 3.5%. It last increased its dividend by 5.9% in September. Moreover, Thomson Reuters has a 12-month mean target of $24.80 per share on the stock, which represents near-term upside potential of almost 20%.
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Vermilion Energy is a global mid-cap oil and gas producer that benefits from higher WTI and Brent oil prices. It enjoys premium pricing for its Brent oil and European gas over its WTI oil and Albertan gas. Management estimates that about 37% of its production mix will come from commodities with premium pricing this year.
When discussing the payout ratio, management accounts for capital spending as well. Naturally, it aims for a payout ratio under 100%. This year, it estimates a payout ratio of about 93%.
Notably, since 2003 there have been 10 years in which its payout ratio exceeded 100%, but the company managed to maintain the dividend. So, in the case the payout ratio goes over 100%, shareholders shouldn’t be too alarmed.
At $35.13 per share as of writing, Vermilion Energy offers a whopping yield of 7.86%. It last increased its dividend by 7% in April 2018. Moreover, Reuters has a 12-month mean target of $42.90 per share on the stock, which represents near-term upside potential of almost 22%. This implies one-year total returns of about 30% is possible!
There are no guarantees in the safety of dividends in the energy space. However, the management of both Pason Systems and Vermilion Energy have demonstrated they’re committed and able to navigate the challenging energy landscape to keep their dividends safe, at least since 2003.
Meanwhile, both stocks offer good upside potential from current levels. If you’re bullish on the energy sector, consider these dividend gems.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Kay Ng owns shares of Pason Systems and VERMILION ENERGY INC. The Motley Fool owns shares of Pason Systems.