Are you looking for a reliable dividend share in the energy sector? There are some really good ones, including Chevron (NYSE: CVX) And Enbridge (NYSE: ENB). But you have to be careful because some high-yield energy stocks are not what they seem at first glance Devon Energy (NYSE: DVN). This is why dividend investors will want to avoid Devon, but should consider buying shares in Chevron and Enbridge.
Devon rewards investors in a different way
There is nothing wrong with Devon Energy’s dividend policy. You could even rightly argue that this is the most effective way to reward shareholders when oil prices are high. The problem is that investors are also asked to share the pain when oil prices are low. What is going on here? Devon Energy has a variable dividend policy linked to the company’s financial performance.
Because Devon Energy is an upstream producer of oil and natural gas, its top and bottom line numbers are directly tied to the highly volatile price of energy commodities. Investors directly benefit from higher dividends when oil prices are high, and “suffer” directly when oil prices are low because the dividend is cut accordingly. For example, in 2022, the quarterly dividend went from $1.00 per share to a high of $1.55. The year ended at $1.35 per share. In 2023, the dividend fell to $0.49 per share.
More recently, Devon Energy has changed its model slightly, making greater use of stock buybacks as a way to return value to investors. The second quarter 2024 dividend was just $0.35 per share, compared to $0.44 in the first quarter. If all that moving sounds like it wouldn’t work for you, then you probably want to avoid Devon Energy, no matter how big the dividend ends up being.
Chevron is built for the whole cycle
A better choice for most investors will be Chevron. The company is an integrated energy company, meaning its global operations are diversified across upstream (drilling), midstream (pipelines) and downstream (chemicals and refining). While energy prices are still the main driver of performance, broad exposure to the energy sector helps smooth out the sector’s inherent ups and downs.
More important for the dividend is that Chevron has a rock-solid balance sheet. This gives the company leeway to take on debt during energy downturns so it can support its operations and dividend. Currently, Chevron has increased its dividend annually for 37 consecutive years. That’s a pretty incredible feat, considering the massive price swings oil has experienced in recent years.
Chevron’s dividend yield is currently around 4%. That’s attractive compared to the broader market, but value investors might want to wait until Wall Street throws the baby out with the bathwater during the next energy downturn. In such times, Chevron’s returns could rise closer to 10%.
Enbridge is a slow and steady turtle
Enbridge is a large North American energy company, but focuses on the mid-market segment of the industry. That means it owns things like pipelines, storage and transportation infrastructure. Enbridge is unique in that it also owns natural gas utilities and renewable energy sources. But the big story is that all of Enbridge’s assets are determined by fees, contracts, or rates assigned by regulators. So, unlike Chevron and Devon, energy prices are not a major factor in Enbridge’s financial performance. And, unlike these two energy producers, Enbridge’s cash flows tend to be highly predictable over time.
For example, Enbridge has managed to increase its dividend annually for 29 consecutive years. It’s the kind of stock you buy if you want exposure to energy but want to minimize your exposure to commodity risk. The return is as high as 7.3%. That said, yield will likely account for the lion’s share of returns over time. But that probably won’t be a problem for dividend investors who want to live off the dividends they receive from their portfolios.
Be careful what you add to your portfolio
If you take a step back, you’ll see that Devon, Chevron, and Enbridge actually represent three different ways to generate dividend income from the energy sector. There is nothing inherently wrong with the approaches taken, but they are very different. Still, Devon Energy won’t be a good choice for investors who need a reliable income stream. Chevron and Enbridge are simply much better choices for that.
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Reuben Gregg Brewer has positions in Enbridge. The Motley Fool holds positions in and recommends Chevron and Enbridge. 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
