On Friday, Exxon Mobil (NYSE: XOM) issued a press release stating that it earned $1.8 billion in the first quarter of 2016. That might seem impressive, considering oil prices are down 26% from this time last year and 63% from the first quarter of 2014.

However, a quick look at the numbers shows that Exxon Mobil did not generate any cash flow.

[ad#Google Adsense 336×280-IA]That’s a problem because it paid out $3 billion in dividends.

It’s one of the reasons why the stock is rated a “C” for dividend safety by SafetyNet Pro.

SafetyNet Pro is a proprietary rating system my team and I created to empower individual investors.

It analyzes the likelihood of a dividend cut so investors aren’t caught off-guard.

For example, in the past month, Calumet Specialty Products Partners (Nasdaq: CLMT) eliminated its dividend, while Noble Corp. (NYSE: NE) and National Oilwell Varco (NYSE: NOV) cut their dividends 87% and 89%, respectively. All three stocks were rated “F” by SafetyNet Pro.

The system assigns each stock an “A” through “F” rating. An “A” means there is little risk of a dividend cut while an “F” means the stock’s dividend is at high risk of a reduction.

Our system also considers payout ratio, a company’s dividend-paying track record and free cash flow growth.

There’s Still Some Safety

Despite challenges in the oil and gas sector, and the recent two-year price slump, there are still a few energy companies we’ve rated an “A” or “B” for dividend safety…

If you’re looking specifically in the “oil and gas” industry on the SafetyNet Pro database, you’ll find that there are currently just six “B” rated dividends and not a single “A” rated dividend.

Surprisingly, Targa Resources (NYSE: TRGP) is one company that achieves a “B” rating, and it does so with a 9% yield. Typically, companies with such high yields have low dividend safety ratings.

Targa has raised its dividend nearly every quarter since it started paying one in February 2011. We expect it to continue this trend despite an expected drop in cash flow in 2016.

As I mentioned above, you won’t find a single “A” rated stock if you’re just browsing through the “oil and gas” industry on SafetyNet Pro…

However, if you include master limited partnerships as a part of your search for quality dividends in energy, you’ll be pleased with the results.

MLPs are tax-advantaged stocks with strong yields, and they pay distributions instead of dividends. Distributions are often considered return of capital, so investors don’t pay a dividend tax on them the year they’re received. MLPs offer benefits such as tax-deferred income and a lower cost basis, and investors pay taxes only on the capital gains when they sell.

There are 15 MLPs rated “A” and “B.” Of the 15, six are rated “A.”

“A” rated Sunoco L.P. (NYSE: SUN) is a current recommendation in The Oxford Income Letter portfolio. It operates and services gas stations and convenience stores, and I like its 9% yield. Sunoco just raised its distribution last week, for the 11th consecutive quarter. Oil prices have very little impact on Sunoco’s business, and cash flow is expected to jump 23% this year.

Lastly, let’s look at oil pipeline operator Tallgrass Energy Partners (NYSE: TEP). This little-known company is “A” rated with a $2 billion market cap.

Tallgrass sports a 6.9% yield and has consistently raised its quarterly distribution since it started paying one in 2013. The company’s cash flow has quadrupled over the past four years, providing more than enough cash for its distributions.

If oil and gas prices continue to rebound, I expect more companies will see upgrades in the coming quarters. For now, if you want to feel truly confident about the dividend safety of energy companies, it pays to stick to “A” and “B” rated stocks.

SafetyNet Pro currently rates nearly 1,000 stocks for dividend safety. You can check outSafetyNet Pro here.

Good investing,

Marc

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Source: Wealthy Retirement