Oil and natural gas are highly volatile commodities. That's probably the first lesson that investors in energy stocks learn from owning shares in companies like Chevron(NYSE: CVX) and Devon Energy(NYSE: DVN). Even more-stable industry participants, like Enterprise Products Partners(NYSE: EPD), can see their value shift around because of investor sentiment.
But there's a reason to consider all three of these oil-linked dividend payers if you have $500 or $5,000 to invest today.
1. Chevron is the all-in-one play
The energy sector is normally broken into three broad groupings. Companies that produce oil and natural gas operate in the upstream segment. Those that transport oil and natural gas are in the midstream segment. And the ones that process oil and natural gas into things like chemicals and fuel are in the downstream segment. Each segment has different operating dynamics.
Chevron operates in all three: the upstream, midstream, and downstream. This makes it an integrated energy company. Its diversification helps to soften the ups and downs inherent to the energy industry, though it doesn't eliminate the swings entirely.
The company also has a global reach, further enhancing its diversification. And the energy giant has a very strong balance sheet, with a tiny debt-to-equity ratio of roughly 0.2. That allows it to lean on its balance sheet during industry downturns so it can continue to invest in its business and support its dividend.
All in, Chevron is a great option for more conservative investors who want long-term oil exposure in their portfolios. Notably, the dividend has been increased annually for 37 consecutive years. The yield today is an attractive 4.1%.
2. Devon Energy is exposed to energy prices
Devon Energy is a vastly different business. This company operates exclusively in the upstream sector, producing oil and natural gas. It is also geographically focused on North America.
This is an inherently more volatile investment than Chevron and is only appropriate for more aggressive investors. That said, the company's dividend policy lends an interesting twist here because it is variable.
Essentially, Devon Energy pays out larger dividends when its business is doing well. Given its upstream focus, that will generally be when oil and natural gas prices are high. Effectively, shareholders are directly rewarded via larger dividend payments when energy prices rise.
Of course, that also means that dividends will be cut when energy prices fall. And you can't really look at the listed dividend yield as a reliable indicator of the income you'll generate over time (for reference, the yield is currently 3.7%).
But this stock can help to hedge your real-world energy costs, since right as you are paying more at the pump (or to heat your home), you will probably be collecting more in dividends.
The business is solid, too, with an investment-grade balance sheet, low break-even costs, and a decade or more of drilling inventory. If the ability to directly benefit from oil price swings is what you are after, Devon Energy is a good option.
3. Enterprise is the safe way to play oil
Enterprise Products Partners is the least exciting of this trio, but will be the most interesting if you are a conservative income investor. That's partly because of the attractive 6.8% distribution yield and partly because of the consistent business model under which it operates.
Simply put, Enterprise is a toll collector that is largely insulated from commodity price swings.
Enterprise operates in the midstream, with a collection of energy infrastructure assets that would be virtually impossible to replace or replicate. It charges energy companies fees for the use of its assets, so demand for energy is really more important than the price of energy.
Demand is usually pretty strong even when energy prices are low because of the importance of oil and natural gas to the economy. This is how Enterprise has managed to increase its distribution for over a quarter of a century.
It also helps that the master limited partnership (MLP) has an investment-grade balance sheet and that its distributable cash flow covers its dividend by a very strong 1.7 ratio or so. If you want a reliable high-yield energy investment, Enterprise will probably be the one for you.
What's your goal?
If you are looking at dividend-paying oil stocks, generating income is probably a key goal. However, there are different ways to go about dividend investing in the energy sector.
Chevron is a good option for broad exposure and a reliable income stream. Devon Energy is a solid choice for those who want more direct exposure to energy price swings. And Enterprise Products Partners is going to be attractive to conservative investors who want a high yield and as little exposure to energy price volatility as possible.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
