Oil and natural gas are highly volatile commodities. That’s probably the first lesson energy stock investors learn from owning stock in companies like Chevron (CVX -0.23%) and Devon Energy (DVN -2.31%). Even the most established industry participants, such as Enterprise product partners (EPD 0.91%)they can see their value change due to investor sentiment.
But there is a reason to consider all three of these oil-related dividend payers if you have $500 or $5,000 to invest today.
1. Chevron is the all-in-one game
The energy sector is usually divided into three broad groups. 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 those that turn oil and natural gas into things like chemicals and fuels are in the downstream segment. Each segment has a different operating dynamic.
Chevron operates in all three: upstream, midstream and downstream. This makes it an integrated energy company. Its diversification helps soften the ups and downs inherent in the energy industry, although it doesn’t completely eliminate swings.
The company also has a global reach, further strengthening its diversification. And the energy giant has a very strong balance sheet, with a small debt-to-equity ratio of about 0.2. That allows them to lean on their balance sheet during industry recessions so they can continue to invest in their business and support their dividend.
All in all, Chevron is a great option for more conservative investors who want long-term oil exposure in their portfolios. In particular, the dividend has 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 very different business. This company operates exclusively in the upstream sector, producing oil and natural gas. It is also geographically concentrated in 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 gives an interesting twist here because it is variable.
Essentially, Devon Energy pays bigger dividends when its business does well. Given its upstream focus, this will generally be when oil and natural gas prices are high. In effect, shareholders are directly rewarded via larger dividend payments when energy prices rise.
Of course, this 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 cover your energy costs in the real world, since just like paying more at the pump (or to heat your home), you probably collect 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 profit directly from oil price changes is what you’re 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’re a conservative income investor. That’s partly because of the attractive distribution yield of 6.8% and partly because of the consistent business model under which it operates.
Simply put, Enterprise is a toll collector that is largely insulated from product price changes.
The company operates in the midstream, with a collection of energy infrastructure assets that would be virtually impossible to replace or replicate. It takes fees from energy companies for the use of its assets, so the demand for energy is actually more important than the price of energy.
Demand is usually quite strong even when energy prices are low due to the importance of oil and natural gas to the economy. This is how Enterprise has been able to increase its distribution for more than 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 ratio of 1.7 or more. If you want a reliable high-performance energy investment, Enterprise will probably be the one for you.
What is your goal?
If you are looking for oil stocks that pay dividends, generating income is probably a key goal. However, there are different ways to invest dividends 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 changes. And Enterprise Products Partners will be attractive to conservative investors who want high yield and minimal exposure to energy price volatility.