MV Oil Trust: 12.8%-Yielding Energy Play Up 132% in 2021; Raises Dividend
June 17, 2021
MVO Stock Could Be Worth the Risk/Reward Trade-Off
You can’t judge a book by its cover. You also can’t judge a stock by its company’s web site.
Take, for instance, Berkshire Hathaway Inc. (NYSE:BRK.B). The $660.0-billion multinational run by Warren Buffett has quite possibly the most outdated web site on Wall Street. But no one cares. Investors don’t need a flashy web site when they’re seeing high returns.
The same could be said for MV Oil Trust (NYSE:MVO). Admittedly, MV is no Berkshire Hathaway, but its web site is utilitarian, verging on boring. It doesn’t exactly draw you in and make you want to explore. That’s a shame, since the company has a strong underlying business. Moreover, MV Oil Trust stock provides a 12.8% dividend, and its share price has been on fire lately.
As I’ve noted before, there’s a risk/reward trade-off with dividend stocks. The higher the yield, the greater the risk. It’s easy to find a high-yield dividend stock with a tumbling share price and an underlying business that’s garbage. A falling share price lifts a dividend yield, which can make a stock more attractive to yield hogs, but it’s a trap and the best way to lose your initial investment.
It’s better to find a stock with a history of providing investors with both a high dividend yield and a rising share price. Or, at the very least, a high dividend that runs in step with the share price.
Because MV Oil Trust operates in the energy sector, it’s going to face periods of volatility. The energy sector is cyclical, after all. When the economy is running on all cylinders, it’s a great place to be. During a global pandemic or recession, not so much.
The big question that investors have to ask is whether a high-yield dividend is safe and the underlying business is sound. MVO stock is a thumbs-up on both accounts, which can help investors navigate periods of uncertainty.
MV Oil Trust holds interests in the oil and natural gas properties of MV Partners, LLC. Through the partnership, MV Oil Trust owns about 900 oil and gas wells in the Mid-Continent region in the states of Kansas and Colorado. (Source: “Form 10-Q,” U.S. Securities and Exchange Commission, May 14, 2021.)
Most oil and gas exploration and production companies spend millions and millions of dollars drilling new sites. The same cannot be said for MV. Instead, the partnership gets as much as it can out of its existing operations—and it gives the profits to its unitholders.
Like everything, there are pluses and minuses to investing in royalty trust stocks like MV Oil Trust stock. Because they pay out all of their cash flow, their dividend yields tend to be quite high. On the other hand, oil wells eventually run dry. On top of that, oil and gas prices fluctuate based on where we are in the economic cycle.
Quarterly Payout & Share Price Rise
Right now, things are good for MVO stock. And that’s reflected in both its share price and dividend payout.
Case in point: MV Oil Trust stock has paid an annual dividend since 2013. But it hasn’t all been smooth sailing. Because the price of oil and gas fluctuates, so too does the company’s dividend. But because the payout keeps pace with the company’s share price, it remains consistently high.
The 2020 outbreak of COVID-19 sent the global economy into a tailspin and negatively impacted the global demand for crude oil and natural gas. The West Texas Intermediate (WTI) spot price for crude oil dropped sharply at the beginning of 2020, from $61.18 to $12.34 per barrel in late April.
In May 2020, the WTI price started increasing slowly and it averaged $40.18 from September through November 2020, which is the production period represented in the cash received by MV Oil Trust for the first quarter ended March 31, 2021.
Currently, the WTI price has increased to pre-COVID-19 levels and the distribution for the company’s quarterly payment period ended March 31, 2021 was almost double that of the distribution for the quarterly payment period ended December 31, 2020.
As a result, WV Oil Trust was able to raise its first-quarter dividend by 91% to $0.21 from $0.11 in the fourth quarter of 2020. The current payout is $0.84 per year, which, at the current price of MVO stock, translates to a dividend yield of 12.8%. (Source: “MV Oil Trust Announces Trust First Quarter Distribution,” MV Oil Trust, April 5, 2021.)
Again, MV Oil Trust stock’s payout rises and falls in step with its share price, which allows it to provide investors with a consistently high dividend payout. The 12-month trailing annual dividend yield is 6.3% and the five-year average dividend yield is 14.7%.
Below is a chart showing MVO stock’s price and dividend payout over that five-year period.
Chart courtesy of StockCharts.com
As of this writing, MV Oil Trust stock is up:
- 63% over the last three months
- 155% over the last six months
- 58% year-over-year
- 132% year-to-date
The Lowdown on MV Oil Trust
MV Oil Trust holds net profit interest in roughly 900 wells in Kansas and Colorado. As a royalty trust, the company pays out virtually all of its cash in quarterly distributions, which is why it can afford to pay a consistently high dividend yield.
There are risks, namely the prices of oil and natural gas, which impact the company’s quarterly cash distribution and share price. But there are inherent risks with any investment. For those who understand the risk/reward trade-off, this dividend stock can be a lucrative investment.
