The geopolitical conflict in the Middle East has the world on edge. The daily news flow from the region can lead to wide swings in oil and natural gas prices. But the truth is that the energy sector has long been volatile, and today’s events aren’t all that unusual. Which is why long-term investors should probably focus on reliable dividend-paying energy stocks.
ExxonMobil (NYSE: XOM) has one of the most impressive dividend histories in the energy industry. Close behind is Chevron (NYSE: CVX). For those looking to avoid direct commodity exposure, two of the most reliable high-yield stocks are Enbridge (NYSE: ENB) and Enterprise Products Partners (NYSE: EPD). With yields of up to 5.7%, this group of stocks could be your entry point into energy in August.
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Get integrated and focus on the dividend checks
It actually gets easier to find energy stocks if you start with the premise that the energy sector is volatile. Income-focused investors can immediately look for the strongest companies with the best dividend histories. That very quickly leads to Exxon and Chevron.
From a business model perspective, they are both globally dominant integrated energy companies. They have exposure to the entire energy value chain, including the upstream (production), midstream (pipelines), and the downstream (chemicals and refining). Geographically, they can invest where management believes it can find the highest returns. And, the broad portfolio diversification helps to soften the energy market’s normal swings.
Meanwhile, both companies have the lowest leverage among their integrated energy peers. Exxon’s debt-to-equity ratio is around 0.2x, while Chevron’s is roughly 0.25x. That gives them the leeway to take on debt during industry downturns to support their businesses and dividends.
The proof of the model here, however, is the reliable, growing dividends Exxon and Chevron have paid. Exxon’s 2.6% yield is backed by 43 annual dividend increases. Chevron’s 3.7% yield is backed by 38 annual increases. The combination of positives here makes Exxon and Chevron the go-to options for dividend investors seeking direct energy exposure.
Sidesteping the commodity exposure
If the swings in oil and natural gas prices are something you want to avoid, however, you can still find attractive dividend stocks in the energy industry. All you need to do is refine your search to focus on the midstream sector.
These businesses own the energy infrastructure, such as pipelines, that help to move oil and natural gas around the world. They charge fees for the use of their assets, so the volume moving through their systems is more important than the price of the commodities being moved. Two of the best options are Enterprise and Enbridge, which are both industry-leading North American midstream giants.
Enterprise is more focused on the energy sector. Enbridge also owns regulated natural gas utilities and clean energy investments. However, both businesses are designed to produce reliable cash flows to support large dividend payments. Enterprise’s distribution yield is a lofty 5.7%, while Enbridge’s dividend yield is roughly 5%. Enterprise has increased its distribution annually for 27 years, and Enbridge has increased its dividend for 31 years.
The one large drawback here is that Enterprise and Enbridge are both slow-growth businesses, so the yield will likely make up the lion’s share of your return over time. However, if you are trying to maximize the income your portfolio generates, that probably won’t be a problem.
August is as good a month as any
The global impact of the Middle East conflict has clearly highlighted how important oil and natural gas are to the world’s economy. Every investor should probably have some energy exposure. That includes dividend investors. But if you are a dividend lover, you need to shift your focus from oil prices to dividend reliability. Exxon, Chevron, Enterprise, and Enbridge have proven that they know how to survive through the entire energy cycle while continuing to reward investors well for sticking around. Take a close look, and it’s likely that one of these four high-yield energy stocks will fit your needs as August gets underway.
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Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Chevron and Enbridge. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
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