Investors have a bad habit of projecting current events too far into the future. When it comes to energy prices, history is clear: volatility is the norm. So, high energy prices today aren’t a good indication that they will be high in the future. In fact, today’s high prices are likely to be followed by lower prices sooner than you may expect.
Proceeding with caution is a good idea, since the geopolitical conflict that is pushing energy prices higher right now will, eventually, end. Which is why conservative investors will like high-yielders Enterprise Products Partners (EPD 1.43%) and Enbridge (ENB 0.74%). But if you just have to own an oil producer, a company like Chevron (CVX 0.63%) is probably a good balance of risk and reward.
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These toll takers are boring, but they have attractive yields
For most investors, the big draw for Enterprise and Enbridge will be their lofty yields. Enterprise is a master limited partnership (MLP), and it has a 5.6% distrubion yield. Notably, unitholders have to deal with a K-1 come April 15, which makes taxes a little more complex. Enbridge is a Canadian company with a 5.1% yield. U.S. investors have to pay Canadian taxes on their dividends, but some of that can be claimed back when you file your taxes.
Enterprise Products Partners
Today’s Change
(-1.43%) $-0.54
Current Price
$37.19
Key Data Points
Market Cap
$80B
Day’s Range
$37.15 – $37.85
52wk Range
$30.01 – $39.73
Volume
5.2M
Avg Vol
4.6M
Gross Margin
13.45%
Dividend Yield
5.89%
Both companies operate large energy infrastructure portfolios in North America. They charge fees for the use of their assets, such as pipelines, so the volume moving through their systems is more important than the price of the energy products they transport. Energy is vital to modern society, so volumes tend to remain robust regardless of oil prices. All in, the yields here are supported by robust cash flows.
The big story, however, is how reliable these two dividend stocks have been. Enterprise’s distribution has been increased annually for 27 years, while Enbridge’s dividend has been increased for 31 years, in Canadian dollars.
Today’s Change
(-0.74%) $-0.40
Current Price
$53.59
Key Data Points
Market Cap
$117B
Day’s Range
$53.33 – $55.14
52wk Range
$43.59 – $55.49
Volume
5.1M
Avg Vol
5M
Gross Margin
32.74%
Dividend Yield
5.11%
Neither investment is going to excite you, but that’s the point. They are slow-and-steady businesses with attractive yields in an industry known for volatility. Given today’s high oil prices, conservative income investors would be wise to err on the side of caution with Enterprise or Enbridge. Oil prices will eventually fall, perhaps dramatically, when the conflict in the Middle East is finally over. But these two high-yielders should keep paying you through it all.
Chevron is financially strong and diversified
If you still feel the urge to invest directly in an oil producer, despite the fact that oil prices rise and fall over time, then take a look at Chevron. It has an attractive 3.7% dividend yield backed by decades of annual dividend increases. That’s proof of the company’s resilience through the entire energy cycle.
That said, it is important to understand what you are buying. Chevron is a globally diversified integrated energy giant, so it has exposure across the entire energy value chain. While oil prices are a key driver of the company’s performance, exposure to different geographic regions and to the midstream and downstream (chemicals and refining) helps soften the inherent swings in oil prices. On top of that, the company has a very strong balance sheet, with a debt-to-equity ratio of roughly 0.25x. That is low for any company and second only to ExxonMobil‘s (XOM 1.57%) roughly 0.2x in its peer group.
Today’s Change
(-0.63%) $-1.15
Current Price
$181.35
Key Data Points
Market Cap
$362B
Day’s Range
$180.73 – $182.69
52wk Range
$133.77 – $214.71
Volume
367K
Avg Vol
12M
Gross Margin
15.15%
Dividend Yield
3.80%
Exxon is just as good a business as Chevron, so you could buy it as an alternative. However, Exxon’s dividend yield is 2.7%. Given the similarities of the two businesses, Chevron’s higher yield will probably be a better option for most investors.
This too shall pass
High oil prices are great for oil producers. But today’s high oil prices won’t last forever. If you are buying into the energy sector after the oil price surge, you should be thinking about what happens to your investment when oil prices eventually fall. Enterprise, Enbridge, and Chevron have all proven that they can keep paying their lofty dividends even during periods of low oil prices. Don’t underestimate the value of that just because oil prices are high right now.
