Energy stocks are not exactly known for being boring investments. But that doesn't mean you can't find great companies that are worth buying and holding for the long term, even forever in some cases. You just need to go in knowing that they have to be held through the often-volatile energy cycle. If you have that kind of timeframe and $10,000 to invest right now in the energy sector, you'll want to look at Chevron(NYSE: CVX) and Enterprise Products Partners(NYSE: EPD).
Chevron has an incredible dividend streak
There are a lot of things to like about integrated energy giant Chevron, but one that stands out is its 37-year streak of annual dividend increases. Keep in mind that oil and natural gas prices are known for their dramatic, and often swift, price swings. For investors seeking income, Chevron has been a rock in a stormy sea.
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There are a couple of additional strengths to consider here. Notably, Chevron, like all integrated energy companies, has a diversified portfolio that includes upstream, midstream, and downstream assets. Each of these parts of the energy sector has different operating dynamics, and putting them all together under one roof helps to soften the blow from swings in energy prices.
But Chevron also happens to have one of the strongest balance sheets when compared to its closest peers. That gives it the leeway to take on leverage to support its business and dividend during industry downturns. When oil prices recover, it reduces debt to prepare for the next downturn.
Basically, if you are looking for energy exposure, Chevron is a solid way to go about getting it. But there's one more thing to like here: Chevron's 4.2% yield is notably higher than that of its most direct peer, ExxonMobil(NYSE: XOM), which is yielding roughly 3.3%. BP(NYSE: BP) and Shell(NYSE: SHEL), meanwhile, both cut their dividends in 2020. TotalEnergies(NYSE: TTE) is more aggressively shifting its business toward clean energy and makes more aggressive use of debt, so it's a bit more of an acquired taste despite offering a slightly higher yield (investors also have to deal with French taxes, which reduces the income stream). Overall, Chevron is a clear standout within the integrated energy group.
Enterprise Products Partners is focused on playing it safe
Enterprise is one of the largest midstream companies in North America, with an irreplaceable portfolio of pipelines, storage, processing, and transportation assets. This is the vital infrastructure that connects oil and natural gas producers to the world. But the interesting thing here is that oil and natural gas prices aren't all that important to Enterprise's success, because it charges fees for the use of its assets. Demand for energy, which tends to remain robust throughout the energy cycle, is what is most important.
That's how Enterprise has managed to increase its distribution annually for 25 consecutive years. The master limited partnership (MLP) also has an investment grade rated balance sheet, and its distributable cash flow covers its distribution by a very comfortable 1.7 times. Like Chevron, Enterprise is a rock in what is often a stormy energy sea. Add in a 7.1% distribution yield, and you can see why income investors might like Enterprise.
But there's another little fact here that's worth noting. Like Chevron, Enterprise has one of the strongest balance sheets relative to its closest peers. That's by design and is fairly typical, historically speaking. So Enterprise has long been one of the least risky investments in a sector known for high risk. The caveat here is that the lofty distribution yield will probably make up most of an investor's return, but for income investors, that probably won't be a big problem.
Stick around to benefit
Here's the key with both Chevron and Enterprise: You have to buy and hold for the long term. These are well-run energy companies that have proven they can stand the test of time. You should give them the benefit of the doubt when -- not if -- the energy sector gets battered. In fact, an energy downturn could be a great time to add to your positions in these forever stocks.
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Reuben Gregg Brewer has positions in TotalEnergies. The Motley Fool has positions in and recommends BP and Chevron. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
