There’s one key aspect of the energy sector that you can’t ignore: oil and natural gas prices are very volatile. That means going in with your eyes open to the risks, even when energy prices are high. But income investors needn’t worry since there are multiple ways to earn dividends in the energy sector and one of them is likely to be right for you, whatever your appetite for risk.
Here’s why you’ll want to take a close look Enterprise Product Partners (NYSE:EPD), Chevron (NYSE: CVX)And Devon Energy (NYSE:DVN) as the month of May begins.
Enterprise helps move it all
The energy sector is broadly divided into three segments: the upstream sector, which deals with oil and gas production; downstream, which concerns refining and chemicals; and the intermediate canal, which connects upstream to downstream.
Midstream companies, like the one operated by Enterprise Products Partners, typically charge fees for the use of vital resources. pipeline, the transport, storage and processing assets they own. The price of raw materials flowing through its system is not as important as energy demand, which tends to remain robust even when oil prices are low.
The fees Enterprise charges provide it with a reliable cash flow to pay distributions. The Master Limited Partnership (MLP) has increased its distribution every year for 25 consecutive years. Meanwhile, the distribution was covered 1.7 times by distributable cash flow in Q1 2024, meaning there is little risk of distribution reductions.
The huge 7.4% distribution yield is likely to account for the majority of an investor’s return over time, but if you’re looking for a big yield in energy, Enterprise Products Partners is a good fit to get it.
Chevron is the “safe” way to invest in oil
While Enterprise tries to avoid the riskiest aspect of the energy sector, Chevron tries to reduce risk in a different way. To begin with, it has diversified its activities into all three segments of the industry. Upstream, midstream, and downstream sectors all tend to have different business dynamics, which helps mitigate the impact of the ups and downs inherent in energy markets over time.
Oil prices will remain the main determinant of Chevron’s results, but the fluctuations will not be as large as they would be for a purely upstream or downstream company.
Additionally, Chevron has one of the strongest balance sheets among its integrated energy sector peers, ending 2023 with a debt-to-equity ratio of just 0.12. If oil prices collapse, it will have enough room to take on debt to continue financing its operations and shareholder dividends.
This is where Chevron’s impressive streak of 37 annual dividend increases comes into play. The energy sector has seen wild swings over the past three decades, including during the coronavirus pandemic, when the U.S. oil prices actually fell below zero at one point. Even so, Chevron has continued to support its dividend, rewarding investors who stay. If dividend consistency is important to you, this is a stock you’ll want to know very well. The dividend yield today is around 4%.
Devon Energy bets on energy prices
Even if you’re not really interested in playing it safe, there is still a dividend option for you. Devon Energy is a United States-based upstream energy producer. Its upper and lower results are linked to the price of oil and natural gas. When oil prices rise, company performance will benefit. When oil prices fall, its bottom line will suffer.
This is extremely important to understand, as Devon Energy has a variable dividend policy linked to its financial performance. The dividend yield is currently 4.7%, but given the way the company approaches the dividend, one shouldn’t place too much emphasis on this figure. The dividend payment will change.
Because energy prices are so important to Devon’s financial results and dividends, the stock tends to be influenced by rises and falls in commodity prices. This is a significant risk that more conservative investors probably won’t want to take. But if you step back, just when your real energy costs are increasing, for things like heating and gasoline, Devon should increase its dividend.
In other words, it will give you a little more money when you need it most. Of course, the dividend will be reduced when oil prices fall, but at that time your real energy costs should also fall. Devon is a complicated story for a dividend investor, but if you think a little more strategically about your investments, you may find that it’s the perfect option for you.
Something for Every Dividend Investor
If you are a security-focused investor, Enterprise will likely interest you. If you’re looking for a little energy exposure but don’t want to bet the house, the diverse and reliable Chevron might be the best fit. If you can handle more risk, Devon’s variable dividend might be right for you. All three have a lot to offer dividend investors, including attractive yields, heading into May.
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Ruben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool ranks and recommends Chevron. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
3 Dividend-Paying Energy Stocks to Buy in May was originally published by The Motley Fool
