Stocks to Buy Now: Cash in on Dividend Growth in this Energy Subsector

Income investors looking for stocks to buy in the energy space have had several prominent choices over the years.

Integrated names such as Exxon Mobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX), for example, have lengthy dividend increase streaks, though neither fit into the high-yield category.

Royalty trusts and master limited partnerships (MLPs), two asset classes abundant in the energy sector, have surged in popularity in recent years mostly due to their large payouts and high yields. MLPs have also proven popular with conservative investors due to the predictable, prosaic nature of the oil and gas transportation business that leads to a steady stream of rising dividends.

But broadly speaking, the oil services subsector has been left out of the energy dividend conversation.

Oil services investors have had only a couple options within the sector when looking for dividend stocks to buy.

Schlumberger Ltd. (NYSE: SLB), the largest oilfield services provider in the world, has more than doubled its payout since 2006, but that still equates to a paltry current yield of 1.6%. SeaDrill Ltd. (NYSE: SDRL) is the sector's dividend star with a yield of 9.1% -- but questions persist over how valuable that name is at current levels, particularly following a disappointing fourth-quarter earnings report. The stock also comes with a beta of more than two.

However, the high-yield options in the sector are starting to change. And it could be both familiar and obscure names that make the oil services group the next great frontier of dividend growth in the energy patch.

Consider these alternatives for noteworthy dividend growth in the oil services sector in the coming years.

Overcoming Controversy

For a while there, it sure seemed like this drilling services company could not get out of its own way.

I'm talking about Transocean LTD (NYSE: RIG).

First, there was the company's involvement in the 2010 Gulf of Mexico oil spill (the company owned the Deepwater Horizon rig). That prompted shares to fall nearly 50% in less than two months.

Then in 2011, Transocean found itself in trouble with Brazilian regulators due to an offshore spill there.

Despite the tragedy in the Gulf, Transocean proceeded to pay a quarterly dividend of 79 cents a share through 2011, drawing the ire of politicians and regulators along the way. The dividend was suspended in the second quarter of 2012 as the company looked to conserve cash as a way of preparing for some potentially large legal bills.

Fast forward to 2013, when those dark clouds that have hung over Transocean have passed.

Important to dividend investors is the fact that famed financier Carl Icahn has taken a stake in Transocean and is pushing for a $4 per share annual dividend. Icahn has said if Transocean does not make that move on its own that he will propose the dividend at the April 13 annual meeting.

Pressure from Icahn led to yesterday's (Monday's) announcement that the company would reinstate its dividend with an annual payout of $2.24 per share. Based on Monday's $52.19 closing price that's a 4.3% yield.

Icahn's interest in Transocean has sparked rumors of two other scenarios that would reward investors as well. First, there is the obvious forced sale of the company, which is less likely than scenario #2 - a deepwater rig master limited partnership to create shareholder value the way SeaDrill did.

For now, a higher dividend seems the most likely bet and that is a good thing. A $4 payout based on a recent closing price of around $52 would give Transocean a 7.6% yield.

Stocks to Buy Now for the Patient Investor

To be sure, National Oilwell Varco Inc. (NYSE: NOV) is not going to wow anyone with a yield of just 0.8%.

On the other hand, it must be noted that the company did not even pay a quarterly dividend prior to 2010. Since then, the dividend has increased 30%.

National Oilwell Varco reported a fourth-quarter backlog at its rig-technology business of $11.86 billion, up from $11.66 billion in the prior quarter. Combine that with roughly $600 million in free cash and it is fair to expect dividend growth going forward.

Patience could be rewarded here. After all, investors must remember that National Oilwell is starting from a low-dividend base, meaning even large-percentage increases in the payout, for the near term at least, will not equate to an impressive yield.

For another reason to consider National Oilwell as a long-term idea, consider this: The ultimate long-term value investor, Warren Buffett, owns almost 5.3 million shares of the stock.

National Oilwell has a one-year price target of $85.00 - a 28% premium to Monday's close of $66.33.

Looking for more dividend stocks to buy? Check out this list of 10 high-yield options.

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