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By Josh Peters, CFA | 10-22-2014 10:00 AM

5 Dividend Stocks to Buy on Energy's Weakness

This handful of well-run companies can withstand energy price volatility and continue paying out dividends, says Morningstar's Josh Peters.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. The prices of oil and energy shares have been under pressure recently. I'm joined today by Josh Peters. He is the editor of Morningstar DividendInvestor newsletter and also our director of equity income strategy. We're going to talk about if any opportunities have opened up.

Josh, thanks for joining me.

Josh Peters: Good to be here, Jeremy.

Glaser: Let's start with that fall in the price of crude oil. Can you talk a little bit about some of the factors that are driving that?

Peters: Well, this is really just good old-fashioned supply and demand at work. We've had a lot of supply growth for crude oil globally. Companies have been investing all over the world in countries to develop more production because of high prices over the last few years. That's what you expect high prices to do--provide that signal to produce more. We've had a lot of growth, especially here in North America. Our shale-oil boom is putting a lot of additional barrels into the global market. Now, we don't export really from the United States, but we're certainly importing a lot less. And it's a global commodity with a globally set price, so that's having an effect.

At the same time, the demand growth is just not there. Emerging markets have slowed a lot. Europe is just stuck in a funk. So, you're not getting a steady uptake of that incremental supply, and that means the price is coming lower.

Glaser: What impact do these lower prices have on some of the energy firms that own, then?

Peters: It depends, first, on how long it might last. If you think oil is going to go down and keep going down and then stay down, then you've got some challenging economics. But that is really not what we think of as the most likely case because oil isn't getting cheaper or easier to find. And that high cost of discovering a marginal barrel of oil and extracting it and selling it is what we think will continue to support fairly high oil prices for many years into the future.

And in that context, you look at what Saudi Arabia has done, deciding not to curtail production in order to support the price but rather letting the price fall and trying to maintain its market share, that has the effect of curtailing investment and squeezing some of the higher-cost OPEC producers so that they can't invest. And it means you might wind up actually with higher average oil prices over the long run. But in any event, it's that price over the next five, 10, 20, or 50 years that I think you have to be thinking about when you're looking at these companies.

For the big players like Chevron (CVX) and Shell (RDS.A) and Exxon (XOM), they are definitely thinking long term; they are managing their businesses to deliver and pay big dividends and grow dividends over very long periods of time. They have lived through periods of oil-price volatility before. Frankly, oil has been more volatile historically than it's been over the last couple of years. So, people maybe are unfamiliar with the idea that you can have big moves, but certainly these big grownup companies are used to that.

They were able to continue paying and even raising their dividends through the last big downturn in oil prices during the Great Recession. I think that's pretty much what you're going to see through this bump in the road here again. And with that, especially Chevron, which I think of as being a very well-run company with a good production-growth story that will start here in a year or two and extend for maybe five years or longer. To be able to pick up this stock with a yield in the mid to high 3% range, I think that's pretty attractive.

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