When it comes to investing, “the best house in a bad neighborhood” is not the right approach.

You want to focus on “good neighborhoods” (meaning good industries) and then proceed to find the best (or at least best-priced) homes in that neighborhood.

U.S. oil refiners are great example. 

A confluence of factors, which I discussed last summer, was leading to rising and industry profits. In effect, the whole neighborhood held (and still holds) appeal. Some of the industry’s bigger players have really surged in price since my look at the group last August.

The appeal of the biggest refiners becomes evident when you start to focus on their solid cash flow, which is fueling rising dividends and share buyback plans.

#-ad_banner-#These companies’ current dividend yields may seem skimpy, but the stage is set for fast dividend growth in coming years as well, as cash flow surges. Also, share buybacks have been especially impressive in recent years at three of these four major refiners. 

But most smaller refiners are not yet witnessing such share price strength. Back in November, I noted that both Alon USA Partners (Nasdaq: ALDW) and CVR Refining (Nasdaq: CVRR) had been forced to slash or temporarily suspend their dividends in the wake of output issues at their refineries, hammering their prices.

That’s the big risk with these smaller players: They don’t have the broad base of refineries that can help smooth out earnings (and their dividends) in challenging times. 

Still, the market has begun to move on from these two firms’ dividend debacle: Since that profile less than six months ago, ALDW has risen 28% while CVRR has risen 21%.The window to lock in super-strong yields has already passed, now that the entry point is higher. 

What kind of yields should investors expect now? Let’s take a closer look.

CVR Refining, which is Carl Icahn’s favorite sector play, just announced a $0.98 per unit dividend for the first quarter. Refining volumes should stay the same in the current quarter, and the dividend will presumably be similar as well. So that works out to be around $2 in dividends for the first six months of the year. Let’s assume that seasonality and refinery maintenance lead CVR to produce just $1 in dividends over the final six months of the year. That projected $3 annual dividend works out to be an 11.3% yield.

(Note that both CVRR and ALDW are master limited partnerships (MLPs), which pay out almost all of their cash flow in the form of dividends.)

What about ALDW’s dividend? The Dallas-based MLP just announced a first-quarter dividend of $0.69 a unit, which was down from $1.50 per unit a year ago, due to tightening crude oil spreads. 

There’s reason to suspect that the dividend in the current quarter will be even better: “During the second quarter, we intend to successfully execute the planned turnaround at the Big Spring refinery and also to complete the Vacuum Tower Revamp Project. This project will increase distillate yield, improve energy efficiency and allow us to better optimize our crude slate,” the company noted recently. 

Analysts at Goldman Sachs, who rate ALDW a “buy” with a $25 price target (representing 35% upside), anticipate per-unit profits of at least $2.75 in both 2014 and 2015. The MLP status means that at least 90% of income must be returned to shareholders. So using $2.40 as the base dividend for ALDW, the prospective yield jumps to 13%. 

Risks to Consider: The current price spread between West Texas intermediate crude and Brent crude is around $8, which is a level that supports decent (if not great) refining margins — but a compression in that spread would hurt margins and put these dividends at risk. ADW and CVRR sport such high yields precisely because these dividends can be erratic.

Action to Take –> We don’t know the future direction of crude oil prices, but we do know that America’s energy renaissance is now having a huge impact on the refining sector. Exports of refined products have been moving higher as well and should keep rising, setting the stage for even better days ahead for all U.S. refiners.

P.S. My colleague Dave Forest just returned from visiting what could be the world’s first $1 trillion boomtown situated in the center of massive new oil and gas deposits. Several oil and resource mining companies are poised to make billions from this under-the-radar hotspot, including one that’s up 1,500% in the past year. To get access to some of the stock names and ticker symbols he’s recommending, follow this link.