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Check Out the Outstanding Yield in this Top-Ranked Oil Stock

In one of the longest bull markets in history, investors have understandably focused on growth and been handsomely rewarded for it. What’s often overlooked, however is the effects of dividends on total portfolio return. Many companies have been focused on share repurchase programs to return cash flow to investors and the result is that share prices have appreciated and the broad market indexes remain close to all-time highs.

Good old-fashioned cash dividends have fallen somewhat out of favor as investors increasingly seek the potential for share price appreciation, and the dividend yield of the S&P 500 is currently 1.8% annually, close to the its historical lows. For over a hundred years - from the advent of index recordkeeping until the 1980’s - that dividend yield was consistently between 3% and 8% with a long-term mean of 4.35%.

Source: mutpl.com

In the most basic sense, an equity investment is an interest in the future cash flows of a company. Investors expect to be rewarded for taking risk in an enterprise by being paid a return in excess of lower- risk instruments like bonds. Once upon a time, once a company matured and began delivering steady cash flows, they also began paying investors with regular dividends.

Even with the spectacular appreciation we’ve seen in equity prices over the past 10 years, there is still a place in a diversified portfolio for consistent dividend paying stocks, especially because they can provide valuable income in the event of a correction in the prices of growth stocks.

Calgary-based Vermillion Energy (VET) is an oil and gas producer operating in North America, Australia and Europe. Even though oil prices have leveled off lately, Vermillion is dedicated to a sustainable business model that provides reliable income to shareholders in a quarterly dividend. Their three-part Growth and Income model combines high margins, low base production decline rates – which reduce capital requirements – and strong capital efficiencies.
VET pays $2.10/share in annual cash dividends – a yield of almost 7%, more than three times the yield of the S&P 500.

In their most recent earning presentation to investors, they explain that they are a “defensive issue with multiple risk-reducing attributes: global commodity exposure, project diversification and relatively low financial leverage.” The report also stresses that “all major business units generate free cash flow with stable-to-growing production over the long term.”

Of course, the ability of a company to continue paying dividends depends on the production of free cash flow and this is an area where Vermilion shines. Management is focused on sustainable cash flows and keeping the dividend safe. With revenues that are rising at a double-digit pace, rewarding investors is a top priority.

With earnings growing year over year, VET is a Zacks rank #1 (Strong Buy).

Although huge growth stocks and their impressive share appreciation lately have helped portfolios grow in value during the bull market, investors would be wise not to ignore steady, defensive dividend payers as a way to generate income and weather any unforeseen storms in the broad markets.

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