Investors are naturally looking to dividend-paying stocks for income now that the interest rates being paid on traditional vehicles to park cash are next to nothing. The shares of the major integrated oil companies are a good place to find some good-yielding investments with a reduced level of risk.

The major oil companies under our coverage include the shares of Exxon Mobil (XOM Free Exxon Stock Report), Chevron (CVX - Free Chevron Stock Report), Royal Dutch Shell (RDS/A), BP (BP), and Total (TOT). The average yield on this group of stocks was recently around 4.0%. Put simply, the dividend-paying capabilities of those companies are dependent on the ongoing use of oil in the global economy. Worldwide consumption of around 88 million barrels a day in 2011 (that’s 32 billion barrels for the full year, and a lot of fuel any way you look at it) points to the reliance on oil as an industrial commodity.

Prospects are favorable for oil demand to rise, as well, despite the slower-than-normal economic growth occurring these days. However, some industry forecasts for global petroleum demand growth have recently been reduced to less than 1% for 2012 and 2013. By far, most of the projected increase arises from the development of emerging economies, with China in the forefront.

Longer term, there is some uncertainty as to just how much more oil can be pumped. The peak-oil theory holds there is not a bottomless pit of reserves, and it may be that not much more than 90-100 million barrels a day can be produced. The idea of limited supply availability is being given a measure of credence, as evidenced by oil prices that are much higher than they were a decade earlier, even as commercial inventories have, for the most part, remained steady. The positive for drillers if oil becomes scarcer is that their reserves would be valued more highly, although more expensive oil, in turn, would cause consumers to conserve more and push them toward alternatives to oil, sapping demand growth. But, consumers probably won’t be weaned off their dependency on oil for many years.      

As for the big oil companies themselves, one factor that speaks especially well for them as dividend payers is their financial strength.  This group contains some of the biggest and strongest companies in the world, most with rock-solid balance sheets and exceptional cash flow that gives them the ability to maintain dividends, and raise them when times are good. The combination of financial strength and share price stability provides many of the stocks listed above with high Value Line Safety ranks. Conservative investors should like what they see here as a result.

Of course, this is not a perfect world, and something could always go wrong. A sustained collapse in oil prices would hurt industry profitability badly, and might threaten dividend–paying capabilities. In fact, oil prices did nosedive in late-2008 from nearly $150 a barrel to around $35 a barrel in early 2009, but then quickly bounced off their lows as it became clear that the world’s major economies would recover from the recession, albeit slowly.

At the company level, the nationalization of assets by host countries, which occurs once in a while, is a big negative, since it reduces production capacity. Moreover, accidents, such as major oil spills, can cause corporate disruption. We saw that when BP suspended its dividend in 2010 following its Gulf of Mexico oil spill and resumed the payout at half of its previous level in 2011.

But, these types of calamities tend to be few and far between. Most of the time, investors can count on good yields, a steady stream of income, and a rising dividend over the years from shares of the big oil companies, with a generally reduced level of risk. Consumers that own oil stocks might feel better about opening their wallets when filling up at the pump, too, knowing that they’re getting cash back from oil companies.

For more information about the companies mentioned here, and for the particular investment merits of the stocks, subscribers are encouraged to check out our full-page reports in The Value Line Investment Survey.

At the time of this article, the author did not have positions in any of the companies mentioned.