Latest EIA numbers show that demand is as low as it's been in a decade or more. Although energy stocks are out of favor right now, over the next several years, these two could easily become growth darlings once again as energy demand inevitably rises. Details here.
Stocks to Buy Now
Income investors looking for stocks to buy in the energy space have had several prominent choices over the years.
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.
As Money Morning Executive Editor Steve Christ told us this week, finding solid dividend stocks in different sectors is a key to finding financial freedom, thanks to compounding.
"This compounding effect arises when your dividend yield is added to the principal. From that moment on, the interest begins to earn interest on itself," explained Christ. "Over the long haul, that process can add up to a small fortune - even with very modest investments. All it takes is time."
How do you find theses reliable dividend payers?
For starters, consider dividend stocks that have a history of raising their payout. Dividend.com recently compiled a list of stocks that have hiked their dividends for at least 25 years.
To take it a step further, we compared that list to Standard & Poor's "Dividend Aristocrats" - large-cap, blue-chip companies that have increased dividends for at least 20 consecutive years.
Some of the "Aristocrats" have hiked their payouts for much longer than that, like these seven, which have done so for at least 50 years:
The wave of deal-making on Wall Street hasn't extended to retail yet. But that's about to change.
That's because retailers make for great M&A candidates - which also makes for some stocks to buy now ahead of this takeover trend.
Takeovers provide chances for companies to cross-sell products and negotiate better with landlords and suppliers. Plus, retailers face low regulatory barriers to deals.
That's why major retailers are among a list of 71 companies Morningstar says are some of the most likely takeover targets this year.
"We think 2013 will bring an uptick of deal activity," said R.J. Hottovy, director of global consumer equity research for Morningstar. "There's no shortage of companies with available capital on their balance sheets and high operating margins, fewer organic growth opportunities and candidates with attractive valuations."
Since legendary investor Warren Buffett took a liking to solar this year, investors have been wondering if it's time to revisit this beleaguered industry when looking for stocks to buy in 2013.
The solar sector has endured a beatdown for about two years, with massive oversupply of solar panels and unfavorable publicity combining to keep solar stocks down.
MidAmerican announced a $2 billion to $2.5 billion deal to buy two California solar power projects from SunPower Corp. (Nasdaq: SPWR). MidAmerican also agreed in January to invest in what will be the world's largest solar photovoltaic operation, which is partly owned by First Solar Inc. (Nasdaq: FSLR).
Many solar stocks and solar ETFs, including Market Vectors Solar Energy (NYSE: KWT) and Claymore/MAC Global Solar Index (NYSE: TAN), have soared on the MidAmerican news. They're both up about 17% this year.
Does this mean investors should follow Buffett into solar stocks? Here's a look at the sector.
Here's how to get rich in stocks: Buy elite businesses at a good price and let the dividends compound over the years. That's the safe, steady road to building true wealth.
The key is in selecting the right stocks to buy.
However, most investors starved for solid dividend-payers often overlook one of the safest and most lucrative sectors - small cap dividend stocks.
But therein lies the problem--everybody knows they are great companies. That alone can drive their share prices to dizzying heights.
So investors who limit their choices to the big blue chips can end up paying too much-while missing out on another category of stocks that could make them even more money.
In short, they miss the quality small-cap dividend-payers. Here's why that is a big mistake for most investors.
Small Cap Stocks to Buy
Small-cap stocks can be an individual investor's best friend.
In the period between 1927 and 2009, small-cap value stocks returned 14.9% per year.
Meanwhile, returns on large-cap value stocks averaged roughly 3% less per year.
So why do these small frys outperform their larger cousins?
First of all, their small size makes them fly under the radar of many institutional investors.
What's more, mutual funds and pension funds have billions to invest, making it nearly impossible to buy and sell small stocks without having a huge influence on the price. As a result, a fund manager may find himself chasing a stock higher as he tries to take a meaningful position simply because he's the only big buyer.
Second, because the big fish tend to attract the big bucks, small caps are often ignored by Wall Street analysts. Most analysts simply aren't about to spend precious hours researching a company that no one follows.
So "in-the-know investors" buying small cap dividend payers face a lot less competition and can pick up shares at a good price.
Plus, many of these small cap dividend machines actually have a lot in common with their big brethren.
Like many large-cap, dividend-paying stocks, these companies generate tons of cash flow, have great brand names and wide competitive moats in their respective industries.
The bottom line: Investors who are willing to accept a slightly higher degree of risk should consider investing in small-cap value stocks that pay dividends.
Three Small Cap Dividend Machines
With that in mind, here are three small caps that are members of the Russell Global Small Cap Dividend Achievers Index. To qualify they must have raised their dividends annually for more than 10 years and meet minimum cash volumes.
In short, these are companies that throw off plenty of cash and safe dividends.
There has been a lot of discussion among investors over the past few years about whether the banking industry offers any quality stocks to buy now.
The big banks brought the economy to its knees in 2008 and had to be bailed out by the federal government with taxpayer dollars. The disastrous decisions at large banks spilled over to the smaller banks and caused severe economic distress for many of them.
Many banks were forced to close with 140 banks failing in 2009 and another 157 in 2011.
Although the numbers have tapered off some we still saw more than 50 banks fail last year as a result of residual problems from the housing boom and ensuing credit crisis. This type of carnage is reflected in the price of many small banks, which are just now starting to see their balance sheets and stock price show signs of improvement.
We now face an environment much like the aftermath of the savings & loan debacle in the late 1980s and early 1990s.
You see, during the economic boom from 2001 to 2007 many new banks opened across the United Sates to take advantage of the cheap money from the Fed and the high demand for housing and home equity loans.
Now in the aftermath of the implosion of housing prices, we find ourselves with too many banks even after all the failures. We have seen some bank mergers in 2012 but this is just the start of what will be a massive wave of bank and thrift consolidation activity.
While we have seen some economic recovery, we continue to operate in a better but not good economy. Loan demand is still fairly tepid and is well below pre-crisis levels. It is difficult for many banks to gain market share and maintain profitability.
As we enter 2013 banks face new regulation and compliance costs that may further crimp operating profits. Smaller banks in particular are experiencing high levels of frustration at their inability to remain profitable and grow their franchise. Shareholders are unhappy after several years of poor share-price performance and want to see a return on their investment.
For many the best path is going to seek a suitor and sell out to a larger competitor.
For investors this creates an enormous opportunity for long-term profits, if you know the right stocks to buy now.
Many investors have one or two "safe" stocks they own that, for whatever reason, have become sentimental favorites they never consider selling.
These companies typically are household names, large, and considered by almost everyone - even fund managers - to be safe investments.
That means even if you're not holding such stocks in your personal portfolio, you may own mutual funds that own them, or they could lurk somewhere in your 401(k).
Many "safe" stocks are really hidden time bombs, ready to blow a big hole in your portfolio at any moment.
And as Money Morning Chief Investment Strategist Keith Fitz-Gerald points out, even the most stable, veteran companies can morph into portfolio-destroying dogs.
"Just because you think a stock is safe doesn't mean that the markets will treat it that way," Fitz-Gerald said.
What's more, he said, is that "the very definition of safe has changed," noting how the massive leverage common on Wall Street can unravel a company almost overnight, as happened with Lehman Brothers at the height of the 2008 financial crisis.
Shale oil production continues its upward path, increasing overall U.S. oil production and making specific groups of energy stocks among the best to buy right now.
In fact, the U.S. Energy Information Agency (EIA) reported last month that domestic oil production surpassed the 7 million barrel a day level, the highest point in nearly 20 years. Production this year, the EIA says, will rise by another 14%.
This is obviously good news for the companies producing that oil, and it gets even better. Many industries outside the energy sector, including chemicals and railroads, have benefited from the shale boom.
But there is one subsector in the energy industry that has reaped the rewards of plentiful oil from the Bakken and other areas more than any other, and that's the refining industry.
Following a banner year for dividend stocks in 2012, 2013 is delivering more of the same as an increasing number of companies are either initiating cash dividends or boosting existing payouts.
From Feb. 1 to Feb. 8, at least 15 companies increased their cash dividends. That list included familiar names such as Dow component 3M Co. (NYSE: MMM), Allstate Corp. (NYSE: ALL) and Archer Daniels Midland Co. (NYSE: ADM), a new addition to Warren Buffett's Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) equity portfolio.
It was more of the same when 14 companies raised their payouts in the week ending Feb. 15. That list includes Comcast Corp. (Nasdaq: CMCSA), PepsiCo Inc. (NYSE: PEP) and United Parcel Service Inc. (NYSE: UPS).
With all these familiar blue chips delivering ever-increasing dividends, it is not surprising that some stocks of the same caliber go overlooked by investors. Here are a couple of those unheralded names investors on the hunt for dividend stocks should become more familiar with.
The only thing better than a sector with a lot of growth potential - like energy stocks - is finding a financially sound group of stocks to buy within that sector that pays a healthy dividend to boot.
And a recent screen by investment research firm Value Line turned up five such energy stocks, all electric and gas utilities.
Technically, Value Line cast a wider net that included all stocks. The screen actually yielded 17 stocks, many of them well-known companies like McDonald's Corp., Lockheed Martin and General Mills.
But the beauty of an exercise like this is finding the less-obvious gems, which in this case turned out to be mostly energy stocks.
Value Line used several proprietary filters - financial strength, safety and timeliness -
to narrow the list.
In last week's State of the Union Address, U.S. President Barack Obama delivered some hints as to where he'll focus his spending over the next four years - signaling some stocks to buy in 2013.
In his speech, President Obama made reference to the critical need for infrastructure spending in the United States. He proposed a "fix-it-first" program to address some of the more pressing needs among our nation's roads, highways, bridges and other areas in need of repair.
We have heard this type of political commentary before as the need for infrastructure repair was a highlight of the 2008 campaign. Deteriorating infrastructure is a growing problem in the United States.
The past three years, from an investment viewpoint, have had many surprises for those trying to decide which stocks to buy.
Perhaps one of the biggest surprises is having one of the world's best performing economies - China - right alongside one of the poorest performing stock markets - Shanghai - over the past three years.
The darkest days were in late November 2012 when the Shanghai index dipped below the 2,000 level for the first time in nearly four years.
But the Shanghai index staged a remarkable turnaround, rallying 23% just since the start of December.
With the beginning of the Chinese New Year - the Year of the Snake - it's a good time to evaluate if this market rally will make Chinese stocks good ones to buy.
Recently Money Morning Chief Strategist Keith Fitz-Gerald pointed out that insider selling has been soaring of late. He pointed out that according to Vickers Weekly Insider Report the ratio of insider selling to buying by officers and directors stood at better than 9 to 1.
This is a level that has been predictive of near-term tops in the stock market and individual investors need to be on alert for potentially falling stock prices ahead. While this indicator is not a precise timing measurement it is a red flag telling us that the people running publicly traded companies have concerns about valuation and prospects as we head deeper into 2013.
Insiders can tell us something about the potential performance of individual companies as well.
As far back as the mid-1960s Victor Niederhoffer and Jim Lorie combined on studies that showed insider cluster selling was predictive and indicative of lower prices over the next 12 months. Professor Nejat Seyhun of the University of Michigan has also done extensive research and concluded that when insiders sell in clusters it is likely that lower prices are ahead.
Given that insiders in the aggregate are warning of a market decline it is useful to take a look at which stocks are also showing warnings of lower prices ahead.
Investors often look to Warren Buffett's purchases when trying to pick the best stocks to buy.
And with good reason: Buffett's conglomerate, Berkshire Hathaway (NYSE: BRK.A, BRK.B),
has an impressive track record and got off to a stellar start this year. Berkshire Hathaway gained 8.7% in January, beating the Standard & Poor's 500 Index's 6% rise and the Dow Jones Industrial Average's 7% increase.
It's also a good sign when Buffett's picks include companies with heavy insider buying, given insiders buy because they expect shares to rise.
That's why MarketWatch and Insider Monkey just took a look at Buffett's 38 holdings and compared his purchases to stocks that have had sustainable insider buying in the past 90 days.
And who knows better than insiders? These folks are privy to the most current information on their companies' prospects, and research shows stock prices rise more after insiders' net purchases than after net sales.
MarketWatch and Insider Monkey came up with the following five stocks to buy now, based on Buffett's holdings and insider buying.