Energy is one of the most volatile sectors on Wall Street, but there is a nuance to the sector that is very important. This is especially true if you are a dividend investor looking for reliable high-yield stocks. A good example of a stock dividend that investors may prefer to avoid is Devon Energy(NYSE: DVN)while Partners for business products(NYSE:EPD) And Enbridge(NYSE: ENB) are two options that are definitely worth exploring. This is why.
A flowing oil well is the first thing many investors will think of when you say the words “energy sector.” That in itself is not wrong. In fact, Devon Energy does almost exactly that, although it drills for both oil and natural gas. It’s pretty good at it too.
Image source: Getty Images.
For starters, the company has a fairly low breakeven price of around $40 per barrel. That means Devon can remain profitable even if oil prices are somewhat weak. The country then has an inventory of drilling opportunities for more than a decade ahead. This means it can both increase production and compensate for resources that are in natural decline. It also produces both oil and natural gas in multiple onshore US energy regions, which helps diversify the revenue stream as much as possible for a company focused on energy production. All in all, Devon is a reasonably well-run and respected energy producer.
DVN dividend per share (quarterly) chart
The problem is that Devon’s sales and profits are completely dependent on the price of oil and natural gas. An upstream-oriented company like Devon cannot do anything about that. And that means earnings and revenue can be very volatile, because energy commodities can be very volatile. For dividend investors, the story becomes even more complicated because Devon Energy’s dividend is designed to move up and down with its financial results. A variable dividend policy is a good way to ensure that shareholders are rewarded when energy prices are high. But despite the 5% dividend yield on offer here, it’s not a good thing if an investor wants to create a consistent and reliable income stream.
That said, midstream is a very different segment of the energy sector. Major players like Enterprise and Enbridge own the energy infrastructure, such as pipelines, that help move oil and natural gas. They generally charge fees for the use of their vital assets. Because the energy sector could not function without the assets that such midstream providers own, they tend to generate very reliable cash flows. In particular, the demand for energy is more important than the price of oil and natural gas. And energy demand is usually quite robust, even when energy prices are low.
Enterprise is a master limited partnership (MLP). Its distribution has increased for 26 years in a row and has a high yield of 7.2%. Enbridge, a Canadian company, has increased its dividend in Canadian dollars for 29 years in a row. The yield today is 6.5%. So not only do these two midstream giants offer higher yields than Devon, but they have also proven that investors can trust the dividend to grow over time.
Enterprise and Enbridge are not interchangeable. For example, Enbridge aims to change its operations along with energy demand. So it has increasingly shifted to natural gas assets, including regulated operations of natural gas utilities. And it has been building up its exposure to renewable energy. Enterprise remains closer to the core, although it tends to focus more on the natural gas sector than some other midstream companies. Yet both are built to generate reliable cash flows, so investors can rest assured they’ll get paid well if they stick around.
There’s nothing wrong with Devon, but dividend investors have better options. That is in no way intended to discredit Devon Energy; it is a well-managed energy producer. It’s just that producing energy is an inherently volatile business. Enbridge and Enterprise operate in a segment of the energy industry known for generating stable cash flows. And as a result, they can both pay more to income investors and income investors can have more confidence that the checks they collect won’t suddenly shrink because of volatile energy prices. Given the high yields offered by Enterprise and Enbridge, dividend investors with a long-term focus should feel quite comfortable buying these midstream giants today.
Consider the following before purchasing shares in Enbridge:
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Reuben Gregg Brewer has positions in Enbridge. The Motley Fool holds and recommends positions in Enbridge. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
2 High-Yield Energy Stocks to Buy By Hand and 1 to Avoid was originally published by The Motley Fool
