FTSE 100 giant Shell isn't the only dividend stock I'd buy for the next five years

What's the best way to profit from the oil market recovery? Many of the best stocks in this sector have already delivered significant price gains and no longer look cheap.

Despite this I think there's still value on offer. The oil market recovery is still at a fairly early stage. By targeting a mix of income and growth, I think it should be possible to enjoy market-beating gains.

Drill, baby, drill!

When US shale drilling numbers slumped during the oil crash, well construction and completion specialist Hunting (LSE: HTG) lost two-thirds of its value.

However, shareholders who kept faith with the firm have been rewarded. The group successfully restructured its manufacturing operations and is now seeing rising volumes against a reduced cost base.

In a quarterly update issued today, the firm said that activity levels in North America remain stable while international and US offshore markets are showing "signs of improvement". Management said that global oil and gas operators are now starting to consider major new projects.

Hunting's recovery over the last year has been dramatic. In Q1 2017, the company reported underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of $5.5m. Today the company reported an equivalent figure of $32.7m for Q1 2018.

Better than expected

This strong start to the year has resulted in management upgrading guidance for the full year. The company now expects full-year profits to be "within the upper half of current market consensus".

Based on the broker forecasts provided by Reuters, I estimate that this means adjusted earnings are expected to be between 24p and 33p per share. Taking the mid-point of 28.5p, this puts the stock on a forecast P/E of 27.

This may seem expensive, but Hunting's earnings are still well below historic highs. Brokers expect earnings to rise by a further 48% in 2019, which would drop the forecast P/E to 22. The group is also expected to restart dividend payments this year and I continue to rate the shares as a buy.

Load up with this 5.4% yield

I believe Hunting can provide attractive growth plus some income. But if you're looking for a high dividend yield, you'll probably need to look elsewhere. My top pick for oil sector income is FTSE 100 giant Royal Dutch Shell (LSE: RDSB).

In my view, this behemoth has exited the oil crash in slightly better financial shape than rival BP, and with stronger growth prospects.

Shell's acquisition of BG Group in the midst of the downturn attracted some critics at the time, but it's starting to look very smart. The group has gained access to a number of major oil and gas fields which it can finance and run more cheaply than BG.

Analysts expect the group's underlying earnings to rise by 28% to $2.46 per share in 2018. That puts the stock on a forecast P/E of 14, with a prospective yield of 5.4%. Although the dividend payout is expected to remain flat this year, earnings cover should improve from 1 times to 1.3 times, securing the payout and paving the way for possible future growth.

I rate Shell stock as one of the top income buys in the FTSE 100. But to make sure your portfolio doesn't become too dependent on oil, I'd recommend checking out these FTSE 100 income tips from the Fool's top analysts.

Buy-And-Hold Investing

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended BP and Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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