Devon Energy (NYSE: DVN) Devon Inc. just agreed to buy Grayson Mill Energy’s Williston Basin operations, further expanding its onshore U.S. footprint. Just days after that news, Devon reported that it was already reaching record production levels. If you’re looking for a pure-play energy producer, Devon should probably be on your list of candidates. But if you’re also looking for dividends, you might want to consider these two other energy stocks. Here’s why.
The Problem with Devon Energy’s Dividend
Devon Energy’s dividend yield is estimated by online quoting services to be around 4.4%. That’s a pretty attractive figure considering that the S&P 500 index yields only 1.2% and the average energy stock, using Energy Select Sector SPDR ETF (NYSEMKT: XLE) as an industry proxy, has a yield of 3.1%. The problem is that the stated yield of 4.4% is something of a mirage.
The problem isn’t the data feed; it’s Devon’s dividend. The high and low end of the spectrum for this pure-play energy producer is inherently driven by volatile oil and natural gas prices. That means revenues and profits can swing wildly at times. Devon has decided that the best way to reward investors in good times while protecting the company in bad times is to adopt a variable dividend policy. That way, the dividend rises along with energy prices, but it also falls. The end result is that you can’t really trust the dividend yield, because by definition it will fluctuate. That’s not going to be acceptable to most dividend investors, especially those trying to live off the income their portfolio generates in retirement.
Chevron is a dividend stock that goes all the way through the cycle
Chevron (NYSE: CVX) also has a dividend yield of around 4.4%, but it has increased its dividend annually for 37 years in a row. The big difference between this energy giant and Devon is that Chevron’s operations span upstream (energy production), midstream (pipelines), and downstream (refining and chemicals). This helps soften the blow from volatile energy prices, as different segments of the energy sector perform differently at different times.
Chevron enhances its resilience by using leverage sparingly. Its debt-to-equity ratio is currently about 0.15 times, which would be low for any company. But that low leverage during the good times gives Chevron room to add leverage during the bad times, which supports both its business and dividend-paying capabilities throughout the energy cycle. To be fair, Chevron probably won’t be a very rewarding stock to own while energy is rallying, but for most income-oriented investors, that will be more than compensated for by the company’s dividend resilience during energy crashes.
Enbridge is a boring and reliable dividend grower
Enbridge (NYSE: ENB) is even more conservative than Chevron, because it comes from the midstream segment of the energy sector. The midstream largely charges a fee to help connect the upstream to the downstream (and the rest of the world) via vital energy infrastructure assets, such as pipelines. As such, energy demand is more important than energy prices. Energy demand generally remains robust, even during economic downturns. For example, Enbridge has increased its dividend annually for 29 consecutive years. Its yield is a whopping 6.6%, supported by the reliable cash flows its assets generate.
But Enbridge isn’t just a midstream company. It also owns regulated natural gas utilities and clean energy assets because it wants to provide the world with the energy it needs. Or, put another way, it’s trying to move its business with the world as it transitions to cleaner energy sources. The key, though, is that the company’s utilities and clean energy assets are also reliable cash flow generators. So Enbridge is an attractive, high-yield energy stock that gives you exposure to the energy sector and more, which could make it the best option for conservative, long-term income investors.
If you want a reliable income, look beyond Devon Energy
Devon Energy isn’t a bad company. And its dividend could be an interesting way to hedge against real energy costs (for things like heating and transportation). But it’s not a good way to generate a reliable income stream. For that, you’re better off with Chevron, if you’re looking for oil exposure; or Enbridge, if your primary goal is to maximize your earnings over time.
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Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Chevron and Enbridge. The Motley Fool has a disclosure policy.
Forget Devon Energy, These Unstoppable High-Yield Stocks Are Better Buys was originally published by The Motley Fool
