Oil and natural gas are highly volatile commodities. That’s probably the first lesson energy stock investors learn from owning shares in companies like Chevron (NYSE: CVX) And Devon Energy (NYSE: DVN). Even more stable industry participants, such as Partners for business products (NYSE:EPD)may see their value change due to investor sentiment.
But there’s a reason to consider all three of these oil-linked dividend payers if you have $500 or $5,000 to invest today.
Start your morning smarter! Wake up with Breakfast news in your inbox every market day. Register for free »
The energy sector is normally divided into three broad groups. Companies that produce oil and natural gas operate in the upstream segment. Those that transport oil and natural gas are in the middle segment. And those that process oil and natural gas into things like chemicals and fuel are in the downstream segment. Each segment has different operational dynamics.
Chevron operates in all three sectors: upstream, midstream and downstream. This makes it an integrated energy company. Its diversification helps smooth out the ups and downs inherent in the energy industry, but does not completely eliminate the fluctuations.
The company also has a global reach, further increasing diversification. And the energy giant has a very strong balance sheet, with a small debt-to-equity ratio of around 0.2. This allows the company to lean on its balance sheet during industry downturns so it can continue to invest in its business and support its dividend.
All told, Chevron is a great option for more conservative investors who want long-term oil exposure in their portfolios. It is striking that the dividend has been increased annually for 37 years in a row. The yield today stands at an attractive 4.1%.
Devon Energy is a completely different company. This company operates exclusively in the upstream sector and produces oil and natural gas. It is also geographically focused on North America.
This is an inherently more volatile investment than Chevron and is only suitable for more aggressive investors. That said, the company’s dividend policy here provides an interesting twist as it is variable.
Essentially, Devon Energy pays out bigger dividends when its business does well. Given the upstream focus, this will generally be the case when oil and natural gas prices are high. In effect, shareholders are directly rewarded through larger dividend payments when energy prices rise.
Of course, this also means that dividends will be reduced if energy prices fall. And you can’t really look at the quoted dividend yield as a reliable indicator of the income you’ll generate over time (for reference, the yield is currently 3.7%).
But these stocks can help you hedge your real energy costs, since just as you pay more at the pump (or to heat your home), you’ll likely receive more in dividends.
The company is also solid, with an investment-grade balance sheet, low breakeven costs and at least a decade of drilling inventory. If you are looking for the opportunity to profit directly from oil price fluctuations, Devon Energy is a good option.
Enterprise Products Partners is the least exciting of this trio, but will be the most interesting if you are a conservative income investor. This is partly due to the attractive distribution yield of 6.8% and partly due to the consistent business model with which the company operates.
Simply put, Enterprise is a toll collector that is largely insulated from commodity price fluctuations.
Enterprise operates in the mid-market, with a collection of energy infrastructure assets that are virtually impossible to replace or replicate. It charges energy companies fees for using its assets, so energy demand is actually more important than energy price.
Demand is usually quite high even when energy prices are low, due to the importance of oil and natural gas to the economy. This is how Enterprise has managed to grow its distribution for more than a quarter of a century.
It also helps that the Master Limited Partnership (MLP) has an investment-grade balance sheet and its distributable cash flow covers the dividend by a very strong ratio of around 1.7. If you want a reliable energy investment with high returns, Enterprise is probably the solution for you.
If you’re looking at dividend-paying oil stocks, generating income is likely an important goal. However, there are several ways to approach dividend investing in the energy sector.
Chevron is a good option for broad exposure and a reliable income stream. Devon Energy is a solid choice for those who want more direct exposure to energy price fluctuations. And Enterprise Products Partners will appeal to conservative investors who want high returns and minimal exposure to energy price volatility.
Before you buy shares in Chevron, consider the following:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Chevron wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $896,358!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns November 11, 2024
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.
The Smartest Dividend-Paying Oil Stocks to Buy Now with $500 was originally published by The Motley Fool
