The geopolitical conflict in the Middle East has reduced global oil and natural gas supplies. When supply is reduced in a commodity market, prices rise. When commodity prices rise, companies that produce those commodities generate larger revenues and earnings.
If you are a dividend investor looking at energy stocks today, you need to remember that an end to the Middle East conflict will likely reverse all of that. Increased supply will lead to lower commodity prices and lower revenue and earnings for energy companies. Dividend investors need to stick with companies that have proven they can keep paying shareholders well through the entire energy cycle. Here are four businesses that have done just that.
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You don’t have to buy oil producers to generate energy-related income
If you want to avoid risk, the best place to look for income in the energy sector is the midstream. Businesses here own energy infrastructure, such as pipelines, storage assets, and transportation facilities. They tend to charge fees for the use of the assets they own, meaning the volume passing through their systems is more important than the price of what is being moved. Since oil and natural gas are vital to the functioning of the world, demand for these commodities tends to remain robust regardless of prices.
Enterprise Products Partners
Today’s Change
(0.42%) $0.16
Current Price
$38.00
Key Data Points
Market Cap
$82B
Day’s Range
$37.49 – $38.03
52wk Range
$29.66 – $39.73
Volume
3.2M
Avg Vol
4.8M
Gross Margin
12.86%
Dividend Yield
5.72%
Two of the most reliable income investments in the midstream niche are Enterprise Products Partners (EPD +0.42%) and Enbridge (ENB +1.52%). Enterprise, a master limited partnership, has increased its distribution for 27 consecutive years. Enbridge has increased its dividend, in Canadian dollars, for 31 years. Neither company is particularly exciting, but both have industry-leading positions in North America. That’s a secondary bonus, as they operate far away from the Middle East tensions.
Today’s Change
(1.52%) $0.80
Current Price
$53.30
Key Data Points
Market Cap
$116B
Day’s Range
$52.51 – $53.42
52wk Range
$43.59 – $55.44
Volume
4.1M
Avg Vol
5.2M
Gross Margin
32.74%
Dividend Yield
5.13%
Enterprise has a distribution yield of 5.7%, and Enbridge’s dividend yield is 5.4%. Neither is a particularly fast-growing business, but dividend investors looking to maximize income will likely appreciate these boring but reliable high-yield midstream options in the typically volatile energy sector.
Go big if you want oil exposure
Some investors actually want greater direct exposure to oil and natural gas, given their importance to the global economy. Dividend investors should focus on integrated energy giants like ExxonMobil (XOM 1.08%) and Chevron (CVX 1.27%). One important reason for favoring these two energy giants is their industry-leading financial strength. Exxon’s debt-to-equity ratio is a super-low 0.19x, while Chevron’s is just a touch higher 0.25x.
Today’s Change
(-1.08%) $-1.62
Current Price
$148.91
Key Data Points
Market Cap
$619B
Day’s Range
$146.95 – $150.30
52wk Range
$101.19 – $176.41
Volume
14M
Avg Vol
23M
Gross Margin
21.56%
Dividend Yield
2.71%
Rock-solid balance sheets give Exxon and Chevron the leeway to take on debt during energy downturns, enabling them to continue supporting their businesses and dividends until commodity prices recover. They have both increased their dividends annually for decades despite the inherent volatility of the energy sector.
Today’s Change
(-1.27%) $-2.39
Current Price
$185.21
Key Data Points
Market Cap
$370B
Day’s Range
$183.20 – $186.42
52wk Range
$133.77 – $214.71
Volume
9.6M
Avg Vol
13M
Gross Margin
14.66%
Dividend Yield
3.73%
An additional positive is the integrated business model. They each have exposure to the full energy value chain. And they also have globally diversified portfolios. Different segments of the industry perform differently through the cycle, and different regions of the world can perform differently, too. Being diversified likely limits the upside for Exxon and Chevron, but it also softens the blow when oil and gas prices are falling. If you are a long-term dividend investor, that’s a good reason to buy into Exxon’s 2.7% yield or Chevron’s 3.8%.
To be fair, you’d get a better price and higher yield if you waited for an energy downturn. But if you feel you want to buy an energy stock, Exxon and Chevron are pretty much always solid options for dividend lovers.
Tread with caution with energy stocks
Oil and natural gas are important to the world, and most investors should have some exposure to energy. However, dividend investors need to be extra cautious given the inherent volatility of the commodity-driven sector. Stick with high-yield stocks like Enterprise, Enbridge, Exxon, and Chevron, which have all proven they can pay you well through the good times and the inevitable bad ones, too.
