Most investors should have some exposure to the energy sector in their portfolios because energy is vital to modern society. If you are an investor looking for promising energy stocks — and particularly if you’re a dividend investor — you should consider Chevron(NYSE: CVX), TotalEnergies(NYSE: TTE), and Enterprise Products Partners(NYSE: EPD).
For most income investors, Chevron and its 4.5% dividend yield will be a good option in the energy patch. The top-level reason for that is the incredible consistency of the dividend, which management has increased annually for 38 consecutive years. Given the inherent volatility of oil and natural gas prices, that’s an impressive streak.
The key to Chevron’s success is its business model. Firstly, the company is integrated, meaning it operates in the upstream (fossil fuel extraction), midstream (fossil fuel transportation and storage), and downstream (refining and petrochemical production) segments of the energy sector. Each of these segments performs differently from the others across the energy cycle, so this diversification helps keep Chevron’s business performance more stable over time.
Second, and just as important, Chevron has focused on maintaining a strong balance sheet. Currently, its debt-to-equity ratio stands at a very low 0.22. This gives management plenty of leeway to add leverage as needed during energy sector downturns, so it can continue to support its business and the dividend. When energy prices recover, as they always have historically, management reduces the debt level so that the company will be prepared for the next downturn.
Image source: Getty Images.
Historically, that model has been effective for the company, and even the most conservative dividend investors should feel comfortable owning Chevron. A $2,000 investment today will get you roughly 13 shares of the stock.
There is one potential negative with Chevron, particularly if you consider the world’s changing energy demands. Simply put, the company is all-in on oil and natural gas even as nations around the world are increasingly shifting their infrastructure and investments toward cleaner energy alternatives and renewable power. Because of that, TotalEnergies, with its 5.9% yield, could be a solid choice.
Like Chevron, TotalEnergies is a globally diversified, integrated energy company. The difference is that TotalEnergies has made the decision to start investing in electricity and clean energy now. In essence, it is using the profits from its carbon-emitting energy business to fund its own transition to cleaner energy. At the end of the third quarter, the company’s “integrated power” division accounted for nearly 12% of segment operating income. That’s still fairly modest, but for those who expect the changes in the broader energy sector to impact the fossil fuel segment, TotalEnergies could be a better choice than Chevron.
A $2,000 investment will buy you around 30 shares of TotalEnergies. There is one important caveat, however: TotalEnergies is a French company, and U.S. investors have to pay French taxes and fees on its dividends. You can claim some of those taxes back come April 15, but after you factor in all of the costs of owning the stock, the real yield you’ll book won’t be quite as high as advertised.
If you remain on the fence about energy stocks because of the inherent volatility of commodity prices, you still have some good dividend-paying choices. One of the best is Enterprise Products Partners, which at the current share price has a 6.7% yield and has increased its distributions annually for 27 consecutive years. It is one of the largest midstream players in North America.
The key point here is that Enterprise is primarily a toll-taker business. It charges customers set fees for the use of its energy infrastructure assets, like pipelines. The prices of the commodities moving through its system are far less important to it than the volumes. Given the importance of energy to the world, volumes tend to be robust even when commodity prices are weak.
The one caveat here is that Enterprise is a master limited partnership (MLP). That business structure is designed to pass income on to investors in a tax-advantaged manner, but it comes with some tax complications. The biggest issues are the K-1 tax forms investors will have to deal with when filing taxes, and the fact that MLPs generally do not play well with tax-advantaged retirement accounts.
If you can wrap your head around the MLP complexities, a $2,000 investment will buy you around 61 shares of this highly reliable energy investment. Just go in knowing that Enterprise is a slow-growth business, so its dividends will likely make up the lion’s share of your total returns over time.
The energy sector isn’t as scary a place to invest as the inherent volatility of oil and natural gas prices might make it seem. Chevron is a financially strong and reliable dividend payer despite its energy exposure. TotalEnergies is similar to Chevron, but it adds a clean energy hedge. And Enterprise provides the highest yield of this group without the commodity exposure. One or more of these high-yield stocks could easily add the energy exposure your portfolio is missing.
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Reuben Gregg Brewer has positions in TotalEnergies. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
