Energy is among the most volatile sectors on Wall Street, but there’s a nuance to the industry that is very important. That’s particularly true if you are a dividend investor in search of reliable high-yield stocks. A great example of a stock dividend investors might prefer to avoid is Devon Energy(NYSE: DVN), while Enterprise Products Partners(NYSE: EPD) and Enbridge(NYSE: ENB) are two options that could be well worth examining. Here’s why.
A gushing oil well is the first thing that a lot of investors will think about when you say the words “energy sector.” That’s not wrong, per se. In fact, Devon Energy pretty much does exactly that, though 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 cost of $40 per barrel or so. That means Devon can remain profitable even when oil prices are somewhat weak. Then it has an over 10-year inventory of drilling opportunities ahead of it. This means it can both grow production and offset wells that are in natural decline. It also produces both oil and natural gas across multiple onshore U.S. energy regions, which helps to diversify its income stream as much as possible for a company that’s focused on energy production. All in, Devon is a fairly well-run and respected energy producer.
DVN Dividend Per Share (Quarterly) Chart
The problem is that Devon’s top and bottom lines are entirely dependent on the price of oil and natural gas. There’s nothing an upstream focused company like Devon can do about that. And that means revenue and earnings can be very volatile because energy commodities can be very volatile. For dividend investors the story gets even more complicated because Devon Energy’s dividend is designed to go 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 is not a good thing if an investor is looking to create a consistent and reliable income stream.
That said, the midstream is a very different segment of the energy sector. Big players like Enterprise and Enbridge own the energy infrastructure, like pipelines, that help to move oil and natural gas. They generally charge fees for the use of their vital assets. Since the energy sector couldn’t operate without the assets such midstream providers own, they tend to generate very reliable cash flows. Notably, demand for energy is more important than the price of oil and natural gas. And demand for energy tends to be pretty robust even when energy prices are low.
Enterprise is a master limited partnership (MLP). It has increased its distribution for 26 consecutive years and has a lofty 7.2% yield. Enbridge, a Canadian company, has increased its dividend in Canadian dollars for 29 consecutive years. The yield today is 6.5%. So not only do these two midstream giants offer a higher yield than Devon, but they have also proven that investors can rely on the dividend to grow over time.
Enterprise and Enbridge aren’t interchangeable. Enbridge, for example, has a stated goal of changing its business along with energy demand. Thus, it has increasingly shifted toward natural gas assets, including regulated natural gas utility operations. And it has been building up its exposure to renewable power. Enterprise is sticking more closely to its core, though it does tend to focus more on the natural gas sector than some other midstream companies. Still, both are built to generate reliable cash flows so investors can feel comfortable that they will get paid well for sticking around.
There’s nothing wrong with Devon, but dividend investors have better options. That’s not meant to disparage Devon Energy in any way, it is a well-run energy producer. It’s just that producing energy is an inherently volatile business. Enbridge and Enterprise operate in a segment of the energy sector that’s known for producing steady cash flows. And, thus, they can both pay more to income investors and income investors can be more confident that the checks they collect won’t suddenly shrink because of volatile energy prices. Given the high yields on offer from Enterprise and Enbridge, dividend investors with a long-term focus should feel pretty comfortable buying these midstream giants today.
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Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
