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This Company Just Tripled Its Dividend

In a recent article , I touched on several of the opportunities available to income investors in the energy industry. It just takes knowing where to look.

You see, we recently discovered that more than half of the 21 best income stocks of the past decade come from the energy sector . But since most of the energy investments on that list are not household names, it occurred to me that many investors may not even know the sort of opportunities that are waiting out there.

So in the weeks and months ahead, I'll be bringing you some more insight on my favorite "energy+income" investments that you may not be aware of.

For example, one of my top-rated stocks for subscribers to my Energy & Income advisory is a best-in-class player from a lesser-known energy niche -- oil refineries.

The company enjoys distinct advantages that have enabled it to quadruple its profits and triple its dividend in the past year , even while some of its competitors are closing up shop.

What's been driving the company's profits is something called a "crack spread." Put simply, the crack spread is the difference between what the refinery paid to get raw oil and the money it will be paid for its refined product. In short, the greater the margin ... the greater the refinery's profit .

Refiners on the Gulf Coast and East Coast pay around $115 per barrel for Brent crude, most of which is imported from West Africa, the U.K., Russia, and Venezuela.

But Valero (NYSE: VLO ) , the nation's largest independent refiner, is fortunate enough to have access to cheaper oil from the Eagle Ford Shale in south Texas -- and has been paying roughly $20 less per barrel .

That gives the company a big edge over its competitors who have to use more expensive crude from overseas. As a result, Valero's bottom line has exploded on its increased profit margins.

For the third quarter ended September 30th, Valero reported net income of $1.2 billion, or $2.11 per share. That's a powerful 297% increase from the $303 million earned this time last year -- almost quadruple the amount of profit.

Higher throughput volumes do deserve some of the credit. With demand for refined products on the rise, the company is running 2.6 million barrels through its refineries every day -- 389,000 barrels more per day compared to the third quarter of 2010.

But more important are the fatter crack spread margins that are really juicing the bottom line.

Twelve months ago, Valero was pocketing $8.13 in gross profit for every barrel of refined product it shipped. But the spread between the costs of raw materials coming in and the sales price of finished products going out has widened dramatically. So as of mid-November, that margin had soared to $13.24 per barrel.

Subtract out operating expenses , and Valero is earning a net profit of $8.16 per barrel -- up from just $2.92 a year ago.

While others are abandoning their refining operations -- like Sunoco (NYSE: SUN ) -- or spinning them off as separate companies to reduce the drag on their bottom lines -- like ConocoPhillips (NYSE: COP ) -- Valero has gone on a shopping spree, absorbing properties in Louisiana and the U.K. at discounted prices.

And in a bold vote of confidence for expansion projects slated to come online in 2012, Valero's board just tripled the firm's quarterly dividend .

Valero now pays a $0.15 dividend -- up from $0.05 earlier this year -- for a 3% yield . I know that on the surface a 3% yield is not going to entice most income investors, but by raising its dividend by a factor of three, Valero is signaling its commitment to rewarding investors.

On top of that, there's no reason this industry leader should be trading at just 5.1 times earnings and for just 70% of its book value . Sooner or later, the market will have to recognize Valero's accomplishments and re-price the stock accordingly.

Action to Take --> I purchased shares of Valero for my real-money Energy & Income portfolio earlier this month. With the low valuation, rising profits, and a tripling of the dividend, I think Valero is the best-in-class play. If you'd like to learn more about the other dividend-paying energy stocks I'm finding, be sure to watch this presentation . Within it, I've also included the names and tickers of the top 21 income stocks of the past decade , including the 12 high-yield energy stocks that dominate the list.

-- Nathan Slaughter

Disclosure: Nathan Slaughter and/or StreetAuthority, LLC hold a position in VLO, COP.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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