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.
But why is the yield so high? The answer is quite simple: That yield will likely account for the lion’s share of an investor’s returns over time. The best growth opportunities lie in the past. But if you add low single-digit distribution growth (which is a reasonable expectation given the MLP’s distribution history) to a distribution above 7%, you arrive at the roughly 10% return that most investors expect over time. expect the broader market. For conservative income investors who want big returns from a reliable company, Enterprise could be an even better choice than Chevron.
Chevron is a very well run energy company. It wouldn’t be a mistake to buy it if you’re looking for broad exposure to the energy sector. However, if you are more interested in returns, it may make more sense for you to focus on the midstream segment and buy Enterprise Products Partners, with its high 7.2% yield. It’s boring and the yield will make up the majority of your return over time, but if you’re a dividend investor, it probably won’t bother you at all.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Chevron. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
Should You Ignore Chevron and Buy These Beautiful High-Yield Energy Stocks Instead? was originally published by The Motley Fool
