Energy is one of the most volatile sectors on Wall Street, but there are some very important nuances to this industry. That’s especially true if you’re a dividend investor looking for reliable high-yield stocks. Here are some good examples of stock dividends that investors want to avoid. devon energy(NYSE:DVN)meanwhile enterprise product partner(NYSE:EPD) and enbridge(NYSE:ENB) There are two options worth considering. Here’s why:
The first thing that comes to mind for many investors is a bubbling oil well.energy sector“That’s not wrong per se. In fact, Devon Energy drills for both oil and natural gas, which is exactly what they do, and they’re pretty good at it too.”
Image source: Getty Images.
First, the company’s breakeven cost is fairly low at around $40 per barrel. That means Devon can maintain profits even if oil prices fall a bit. Additionally, we have an inventory of drilling opportunities for the next 10+ years. This means they can both increase production and compensate for naturally declining wells. It also produces both oil and natural gas in multiple onshore energy regions in the United States, helping companies focused on energy production diversify their revenue streams as much as possible. Overall, Devon is a fairly well-run and respected energy producer.
DVN Dividends per Share (Quarterly) Chart
The problem is that Devon’s revenues and profits are completely dependent on oil and gas prices. There’s nothing an upstream-focused company like Devon can do about it. This means that revenues and profits can be highly volatile due to the high volatility in energy products. Things get even more complicated for dividend investors, since Devon Energy’s dividend is designed to move up and down with earnings. A variable dividend policy is a good way to ensure shareholder returns when energy prices are high. However, despite the 5% dividend yield That’s not a good thing if investors are trying to establish a consistent and reliable source of income, as suggested here.
That being said, midstream is a very different segment of the energy sector. Large companies such as Enterprise and Enbridge own energy infrastructure such as pipelines that help transport oil and natural gas. They typically charge a fee for the use of their key assets. The energy sector cannot operate without the assets owned by such midstream providers, so they tend to generate very reliable cash flows. In particular, energy demand is more important than oil and natural gas prices. Also, even when energy prices are low, energy demand tends to be very strong.
Enterprise is a master limited partnership (MLP). It has increased its dividend for 26 consecutive years and has a high yield of 7.2%. Enbridge, a Canadian company, has increased its dividend in Canadian dollars for 29 consecutive years. Today’s yield is 6.5%. So these two midstream giants not only offer higher yields than Devon, but they’ve also proven that investors can rely on dividends for long-term growth.
Enterprise and Enbridge are not compatible. For example, Enbridge has a goal of transforming its business to meet energy needs. Therefore, there is an increasing shift towards natural gas assets, including regulated natural gas operations. and increasing exposure to renewable power. Enterprise tends to focus more on the natural gas sector than other midstream companies, but it stays truer to its core. Still, both are built to generate reliable cash flow, so investors can rest assured they’ll be well rewarded if they stick with it.
There’s nothing wrong with Devon, but there are better options for dividend investors. This is in no way meant to belittle Devon Energy; it is a well-run energy production company. However, energy production is an inherently unstable business. Enbridge and Enterprise operate in the energy sector, which is known for generating stable cash flows. Therefore, both companies can pay out more money to income investors, who can be confident that the checks they collect won’t suddenly be reduced by fluctuations in energy prices. Given the high yields offered by Enterprise and Enbridge, dividend investors with a long-term focus should feel pretty comfortable buying these midstream giants right now.
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ruben greg brewer I have a position at Enbridge. The Motley Fool has a position in and recommends Enbridge. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has Disclosure policy.
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