With October now underway, there isn't one single way to play the energy sector, but that's not new. There have always been different tactics for investing in this volatile niche of Wall Street. The question is, which tactic is right for you?
Here are three of the top energy stocks to consider as you try to answer that query: Devon Energy(NYSE: DVN), Chevron(NYSE: CVX), and Enbridge(NYSE: ENB). Let's see what makes them potential investments this month.
1. Devon Energy is like jumping in with both feet
Devon Energy operates exclusively in the upstream segment of the energy sector. That means that it produces oil and natural gas. There are very big implications in this focus, the most notable being that Devon's top and bottom lines are almost entirely dependent on the price of the commodities it sells. Don't underestimate how much effect this can have on the company's stock price, financial performance, and dividend. Oil and natural gas are known for their dramatic, and often swift, price swings.
Devon exacerbates the effect by having a variable dividend policy. So when energy prices are high, the dividend will be high, but when energy prices are low, the dividend will be low. It is an elegant way of making sure that shareholders benefit directly from high oil prices. But it is not something that an investor looking to live off their dividend checks will probably appreciate.
In fact, investors shouldn't really look at the dividend yield (currently at around 5%) as a reliable indication of the income this stock will generate over time. This stock is most appropriate for investors who believe oil prices will increase, or at least remain at about their current levels.
That said, Devon is a well-respected energy producer. It has an investment grade-rated balance sheet and exceeded its volume guidance in the second quarter of 2024. It's expanding via acquisition, has a fairly low breakeven point (roughly $40 per barrel of oil), and has over a decade of drilling inventory. There's a lot to like, but be prepared to ride the ups and downs of energy prices.
2. Chevron is like slowly wading into the water
Chevron also operates in the upstream, but that's just one part of its business. As an integrated energy company, it operates in the midstream (pipelines) and downstream (chemicals and refining), as well. This diversification, along with a global footprint, helps to soften the peaks and valleys in oil and natural gas prices. Energy prices are still the driving force of Chevron's top and bottom lines, but the business just won't be subject to quite the severe performance swings a pure-play producer would be.
But what really sets Chevron apart from other choices in the energy sector is its balance sheet. The company's debt-to-equity ratio is the lowest among its closest peers at roughly 0.15 times. That gives it the leeway to add leverage during energy downturns, so it can continue to invest in its business and pay shareholder dividends. Notably, the dividend has been increased for 37 consecutive years. Now add in the fact that the yield is roughly 4.3% today, and you can see why Chevron would be a good option for dividend investors looking to add a permanent position in the energy patch to their portfolios.
3. Enbridge is like only dipping your toes in
The last stock to consider is Enbridge, which is a giant North American midstream company. Midstream companies own vital energy infrastructure, which they charge their customers fees to use. There are some important facts to consider here. The energy sector can't operate without the pipelines, storage, and transportation assets that Enbridge owns. Demand for energy is more important than the price of the commodities flowing through Enbridge's system. And energy demand tends to remain robust even when oil prices are low. Overall, Enbridge has a long history of producing reliable cash flows.
Those cash flows support the stock's attractive 6.5% dividend yield. That dividend has been increased annually for 29 consecutive years. If you are looking for a large and reliable income stream, Enbridge has you covered.
There's another interesting story here, because one of the company's main goals is to provide the world with the energy it needs. To that end, it has been expanding into the regulated natural gas utility and clean energy sectors, which together make up around 25% of earnings before interest, taxes, depreciation, and amortization (EBITDA). So not only is Enbridge a solid high-yield option in the energy patch, it's also a hedge of sorts as the world moves toward cleaner energy options.
There are multiple ways to play the energy sector
As the trio of stocks here shows, the energy sector is not a one-size-fits-all affair. There are different ways you can invest, depending on how you want to add energy exposure to your portfolio.
The most aggressive option here is Devon Energy, the pure-play producer. Chevron is something of a middle-ground option that should hold up well throughout the energy cycle, likely continuing to pay you a reliable dividend even during industry downturns. Enbridge is a reliable cash flow generator with a big dividend yield for investors who are trying to maximize their income stream. One of these top energy picks should fit your needs if you are looking for an energy stock in October.
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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 has a disclosure policy.
