Top 3 Dividend Stocks To Buy For The Summer

| April 22, 2016 | 0 Comments

Watch as profits and dividends skyrocket this summer for these three seasonal businesses that perform best in the second and third quarter of the year. Now is the time to start accumulating a position in these stocks that could return high double-digits by late fall of this year.

You have probably noticed that gasoline prices are starting to rise and have increased quite a bit in just the last few weeks. In my area, gas is up about 60 cents per gallon and seems to be climbing every day. The stocks that see immediate profit increases from higher fuel prices are usually the refining companies. The cyclical nature of the refining business has set these stocks up for some very nice gains between now and next fall, and dividend focused investors can count on some nice quarterly payouts.

Refining is an interesting industry to analyze because the prices of both the raw material, crude oil, and end product, gasoline, diesel, heating and jet fuel, are set in the commodity markets. This means that gross refining margins, usually measured on a per barrel basis, are mostly out of control of the refining companies. The factors these businesses do control are their refining efficiencies, which drive down the expenses to refine a barrel, and their sourcing practices, where they buy and how they transport crude oil.

The gross refining margin generated by a refinery can be estimated by looking at prevailing crude oil and fuel prices. Several sources publish “crack spreads” which calculate the profit per barrel of crude oil based on the price of crude and how much gasoline and other fuels are distilled out of the typical barrel.

I track my own crack spread using the NYMEX spot price data for WTI crude oil, New York Harbor gasoline and Diesel fuel. This price data is published weekly on the Energy Information Agency website.

Historically, crack spreads and refining margins are seasonal, with refiners generating the most profits in the spring and summer driving seasons and margins tightening through the winter. Last year, the crack spread I use averaged $21 to $22 per barrel in the second and third quarter and dropped to $14.50 per barrel in the fourth quarter. Through the first quarter of 2016, the spread is averaging under $13 per barrel.

For a refiner, all of the company’s operating, general and administrative expenses are subtracted out of the gross refining margin, and what is left over is net profit. This means a refinery can be tremendously profitable with a $20 plus per barrel margin, making a small profit at a $15 margin and losing money with a $12 margin. These facts result in reported profits that can swing significantly from quarter to quarter and season to season.

RELATED: How to earn 7% a year from a specialty bank in as little as 5 minutes.

With refining margins down for 2015 Q4 and 2016 Q1, refiner share prices are also down. Some of them down a lot. It looks like first quarter results will be significantly below year ago numbers. In contrast to the first quarter, refining profits will recover as we move into the second quarter with the higher levels of fuel demand that come with the driving season. Here are three stocks that will let you generate both very nice dividend payments and big share price gains between now and next fall.
Two refining companies are organized as variable payout master limited partnerships (MLPs). These companies are set up to pay out all of the free cash flow generated for the quarter through their distributions. These quarterly distributions swing by large amounts and so do the MLP unit prices. You can ride the swing as distributions go from the low winter payouts to the high quarterly payments in July and October.

Alon USA Partners LPAlon USA Partners LP (NYSE: ALDW) owns and operates an 80,000 barrel per day refinery located in Big Springs, Texas. For the 2015 second and third quarters, investors earned distributions of $1.04 and $0.98, respectively. The company paid $0.08 per unit for the lower profit fourth quarter. From the current $11.20 unit price, ALDW could move into the mid $20’s and pay an additional $1.00 to $2.00 in distributions between now and November.

CCVRRVR Refining LPCVR Refining LP (NYSE: CVRR) owns two refineries located in Kansas and Oklahoma capable of refining up to 190,000 barrels per day. Distributions of $0.98 and $1.01 for the 2015 second and third quarters were followed by no payout for the fourth quarter. From the current $12.10 per unit CVRR could also move up to $20 as refining margins and distributions recover.

Note: My models show that ALDW and CVRR will pay little or nothing in distributions for the first quarter. You can probably wait until after the Q1 earnings reports before jumping into these two MLPs.

Western RefiningOut of the pure play corporate refining companies, Western Refining, Inc. (NYSE: WNR) offers the most attractive total return potential between now and late fall. Western owns two refineries in El Paso, Texas and Gallup, New Mexico. The company also controls Northern Tier Energy LP (NYSE: NTI), a refining MLP located in Minnesota. NTI will be fully merged into Western Refining by the end of the second quarter.

WNR currently yields 5.6% and the company has been boosting its dividend by about 10% per year. As summer profits return the share price should move from the current $27 up close to $40.
Do not fall in love with these stocks! They are intermediate term plays and you should be out of them by the time the third quarter dividends are paid in mid-November. Between now and then the investment potential is very strong.

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Category: Dividend Stocks

About the Author ()

Tim Plaehn is the lead investment research analyst for income and dividend investing at Investors Alley. He is the editor for The Dividend Hunter, an investment advisory delivering income investments with double digit growth in share price and dividend payments. Tim’s also editor of Weekly Income Accelerator, a covered call trading service, and Automatic Income Machine, a dividend growth service focused on growing your nest egg.

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