There’s one vital aspect of the energy sector that you can’t ignore — oil and natural gas prices are highly volatile. That means you have to go in with your eyes open to the risks, even when energy prices are strong. But income investors don’t have to fret since there are multiple ways to collect dividends in the energy space and one will probably suit you regardless of your risk appetite.
Here’s why you’ll want to take a close look at Enterprise Products Partners (NYSE: EPD), Chevron (NYSE: CVX), and Devon Energy (NYSE: DVN) as May gets under way.
Enterprise helps move it all
The energy sector is broadly broken down into three segments: the upstream, which deals with oil and gas production; the downstream, which involves refining and chemicals; and the midstream, which connects the upstream to the downstream.
Midstream businesses, like the one operated by Enterprise Products Partners, generally charge fees for the use of the vital pipeline, transportation, storage, and processing assets they own. The price of the commodities flowing through its system isn’t nearly as important as energy demand, which tends to remain robust even when oil prices are low.
The fees that Enterprise charges provide it with a reliable stream of cash to pay distributions. The master limited partnership (MLP) has increased its distribution annually for 25 consecutive years. Meanwhile, the distribution was covered 1.7 times over by distributable cash flow in the first quarter of 2024, meaning there’s little risk of a distribution cut.
The huge 7.4% distribution yield is likely to make up the majority of an investor’s return over time, but if you’re looking for a big yield in the energy patch, Enterprise Products Partners is a good way to get it.
Chevron is the “safe” way to invest in oil
While Enterprise tries to sidestep the riskiest aspect of the energy patch, Chevron attempts to reduce risk in a different manner. For starters, it has diversified its business across all three segments of the industry. The upstream, midstream, and downstream all tend to have different business dynamics, which helps to soften the impact of the ups and downs inherent to energy markets over time.
Oil prices will still be the main determination of Chevron’s results, but the swings aren’t going to be as great as they would be for a pure-play upstream or downstream company.
In addition, Chevron has one of the strongest balance sheets among its integrated energy peers, ending 2023 with a debt-to-equity ratio of just 0.12. If oil prices crash, it will have ample room to take on debt to keep funding its business and shareholder dividends.
That’s where Chevron’s impressive streak of 37 annual dividend increases comes in. The energy industry has gone through some very big swings over the past three decades, including during the coronavirus pandemic, when U.S. oil prices actually fell below zero at one point. Through it all, Chevron continued to support its dividend, rewarding investors for sticking around. If dividend consistency is important to you, this is a stock you’ll want to get to know very well. The dividend yield today is an attractive 4% or so.
Devon Energy is a bet on energy prices
Even if you aren’t exactly interested in playing it safe, there’s still a dividend option for you. Devon Energy is a U.S.-based upstream energy producer. Its top and bottom lines are tied to the price of oil and natural gas. When oil prices are heading higher, the company’s performance will benefit. When oil prices are falling, its financial results will suffer.
This is vitally important to understand, because Devon Energy has a variable dividend policy tied to its financial performance. The dividend yield is currently 4.7%, but given the way the company approaches the dividend, you shouldn’t put too much weight on that figure. The dividend payout will change.
With energy prices so important to Devon’s financial results and dividend, the stock tends to be leveraged to the ups and downs of commodity prices. That’s a big risk that more conservative investors probably won’t want to take on. But if you step back, right when your real-world energy costs are heading higher, for things like heating and gasoline, Devon should be increasing its dividend.
In other words, it’ll give you a bit more cash right when you need it most. Of course, the dividend will be cut when oil prices drop, but at that point your real-world energy costs should be falling, too. Devon is a complicated story for a dividend investor, but if you think a bit more strategically with your investments, you might find it’s the perfect option for you.
Something for every dividend investor
If you’re a safety-first investor, Enterprise will probably be attractive to you. If you’re looking for a little energy exposure but don’t want to bet the house, diversified and reliable Chevron could be the best call. If you can handle more risk, Devon’s variable dividend could be right for you. All three have a lot to offer dividend investors, including attractive yields, as we enter May.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
3 Dividend-Paying Energy Stocks to Buy Hand Over Fist in May was originally published by The Motley Fool
