2 High-Yield Energy Stocks to Buy Hand Over Fist and 1 to Avoid
Are you looking for a reliable dividend stock in the energy sector? There are some very good ones, including Chevron (NYSE: CVX) and Enbridge (NYSE: ENB). But you have to be careful because some high-yield energy stocks aren't what they at first seem, including Devon Energy (NYSE: DVN). Here's why dividend investors will want to avoid Devon but should consider buying stock in Chevron and Enbridge.
Devon is rewarding investors in a different way
There's nothing wrong with Devon Energy's dividend policy. In fact, you could competently argue that it's the most effective way to reward shareholders when oil prices are high. The problem is that it also asks investors to share the pain when oil prices are low. What's going on here? Devon Energy has a variable dividend policy tied to the company's financial performance.
Since Devon Energy is an upstream oil and natural gas producer, its top and bottom lines are directly tied to the highly volatile price of energy commodities. Investors directly benefit when oil prices are high through higher dividends and directly "suffer" when oil prices are low as the dividend gets cut accordingly. For example, in 2022 the quarterly dividend went from $1.00 per share to a high of $1.55. It ended the year at $1.35 per share. In 2023 the dividend fell as low as $0.49 per share.
More recently, Devon Energy has shifted the model slightly, increasing its use of stock buybacks as a way to return value to investors. The second-quarter 2024 dividend was just $0.35 per share, down from $0.44 in the first quarter. If all of that moving around sounds like it wouldn't work for you, then you probably want to avoid Devon Energy no matter how large the dividend gets.
Chevron is built for the entire cycle
A better choice for most investors will be Chevron. The company is an integrated energy major, which means that its global business is diversified across the upstream (drilling), midstream (pipelines), and downstream (chemicals and refining). Although energy prices are still the main driver of performance, its broad exposure to the energy sector helps to soften the industry's inherent ups and downs.
More important for the dividend, Chevron has a rock-solid balance sheet. This gives the company the leeway to take on debt during energy downturns so it can support its business and dividend. At this point, Chevron has increased its dividend annually for 37 consecutive years. That's a pretty incredible feat, given the huge price swings oil has gone through over just the past few years.
Chevron's dividend yield is currently around 4%. That's attractive relative to the broader market, but value investors might want to wait until Wall Street throws the baby out with the bathwater during the next energy downturn. During times like that, Chevron's yield can spike toward 10%.
DVN Dividend Per Share (Quarterly) data by YCharts
Enbridge is a slow and steady tortoise
Enbridge is a large North American energy company, but it's focused on the midstream segment of the industry. That means it owns things like pipeline, storage, and transportation infrastructure. Enbridge is unique in that it also owns natural gas utility and renewable power assets. But the big story is that all of Enbridge's assets are driven by fees, contracts, or regulator-assigned rates. So, unlike Chevron and Devon, energy prices aren't a big factor in Enbridge's financial performance. And, unlike those two energy producers, Enbridge's cash flows tend to be highly predictable over time.
That's how Enbridge has managed to increase its dividend annually for 29 consecutive years. It is the kind of stock you buy if you want energy exposure but you want to minimize your exposure to commodity risk. The yield is a hefty 7.3%. That said, the yield will probably make up the lion's share of return over time. But that probably won't be an issue for dividend investors looking to live off the dividends they collect from their portfolios.
Be careful what you add to your portfolio
When you step back, you can see that Devon, Chevron, and Enbridge really represent three different ways to generate dividend income from the energy sector. There's nothing wrong with any of the approaches taken, per se, but they're very different. Still, Devon Energy isn't going to be a good choice for investors who need a reliable income stream. Chevron and Enbridge are just much better choices for that.
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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.
