Chevron (NYSE: CVX) is a very well run energy company. And it offers an attractive dividend yield of 4.3%, backed by 37 years of annual dividend increases. If you’re looking for a diversified energy stock with high returns, this would be a great addition to your portfolio. But if you value returns more than diversification, you may be better off Partners for business products (NYSE:EPD). This is why.
Chevron is what is known as an integrated energy giant. The “most important” part is related to its size and industrial position, noting that given its market capitalization of $270 billion, it is one of the largest energy companies in the world. Its operations are spread all over the world, providing significant geographic diversification. But that’s not the only diversification it has.
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The real cornerstone to be called integrated is that a company must have activities in energy production (the upstream), energy transport (the midstream), and in chemicals and refining (the downstream). These are the three major segments of the broader energy sector, and Chevron is a major player in each. If you’re looking for an easy way to add energy exposure to your portfolio while receiving a significant and reliable dividend, Chevron is an excellent choice.
The only problem is that Chevron’s business is highly volatile both upstream and downstream. That’s because both are driven by commodity products. So Chevron’s financial results can vary widely from year to year, and that can make it difficult for more conservative investors to hold out over the long term.
That’s where a high-yield option like Enterprise Products Partners comes into the picture. The return is even greater: 7.2%. And this Master Limited Partnership (MLP) operates in the most reliable segment of the energy market: the midstream. It owns the transportation assets, such as pipelines, that carry oil and natural gas around the world.
The important piece here is that Enterprise charges fees for the use of the vital energy infrastructure it owns. The volume of energy products passing through the system is more important than the price of the products it transports. Energy demand typically remains high, even during an oil downturn. And so Enterprise’s cash flows are very reliable. Thus, it has managed to increase distribution every year for 26 consecutive years. Notably, the MLP’s distributable cash flow covers the distribution 1.7 times, meaning there is a lot of headroom for setbacks before a cut would be on the table.
