[Editor's Note: Tom Gentile is the co-founder of Optionetics, a financial education company which he later sold to one of the world's largest retail brokerages. Tom leveraged his 25 years of experience trading stocks, futures, and options to teach more than 300,000 people the secrets to profitable, low-risk investing.
Tom is the author of a book, The Trading Index Course, which lays out the basis of his highly successful system for trading options, and he's a frequent contributor to CNBC, Reuters, Bloomberg, and FOX. We're excited to have him with us…]
Oil has been a glutton for punishment, getting rocked by sellers and dropping some 55% from the highs of last July.
Up until just a few months ago, nearly every analyst and hedge fund manager in this space was offering up his or her commentary on how oil had bottomed and how it was time to buy.
Now it seems that fewer traders are willing to make that call, offering a glimmer of hope for contrarians like myself.
In fact, less than two weeks ago, I published a report on the upcoming oil bounce, as well as ways to profit from the expected move higher. One of the safer ways to play the seasonal oil bounce is to look at energy stocks that pay a dividend.
Assess Energy Dividends with a Wary Eye
But beware, not all dividend stocks are created equal. I recently pulled the oil and gas stocks that pay the highest dividends and here's what I found:
This chart is the current Top 10 oil and gas refining stocks. Look closely at this list. The top four have double-digit dividend yields. They might look great on the surface, but don't go for them; it's likely a trap! Let me explain why.
Growing companies reward their shareholders in one of two ways, either through stock appreciation (buybacks, high demand, etc…) or through dividend payouts to shareholders. Now a lot of longer term traders migrate toward dividend stocks as they age, considering them safer. They don't move around much, and they are supposed to pay out regular dividends.
Upon further review, we see that on the day that a dividend is paid out to a shareholder (the ex-dividend day), the stock price should drop by the amount of the dividend.
For instance, if XYZ is trading at $20 a share, and pays a $0.50 quarterly dividend on May 1, you can bet that on May 1, the stock will open $0.50 lower (+/- other market variables) than it closed on the previous day. Over time, however, the buyer of XYZ should expect the stock to rebound, and the trader realizes a gain in the amount of regular dividend payouts. But what happens when a stock drops such as many of the oil, gas, and energy stocks have in the last several months?
When something looks too good to be true, it probably is. It's no exception for oil stocks. As stock prices drop, dividend yields will automatically rise, if the dividend payout remains the same. The problem is, with the price of oil at multiyear lows, these double-digit dividend yields won't be around long as companies will slash dividend payouts to retain needed cash for future operations.
About the Author
Tom Gentile is widely known as America's #1 Pattern Trader thanks to his nearly 30 years of experience spotting lucrative patterns in options trading. Now, he's diving into the biggest market in the world - one that almost no one has heard of before.