2 Obvious High-Yield Energy Stocks to Consider Buying Now

You might not realize it, but oil and natural gas are pretty much everywhere. They’re in gas stations, powering our homes, and even found in various household products. These resources are so deeply entrenched in modern life that, in the near term, finding a viable alternative seems unlikely. This underscores why every investor should consider having energy stocks in their portfolios, especially those focusing on consistent dividends.

Let’s take a look at Chevron, which has a substantial yield of 4.5%. It could be an appealing choice for many. However, if you’re concerned about the volatility associated with oil and gas, you might lean towards North American midstream companies like Enterprise Products Partners, offering a hefty distribution yield of 6.8%. Here are some details to think about before investing in either.

Chevron: Built to Endure

It’s no secret that many conservative investors hesitate to dive into the energy sector, primarily due to its inherent volatility. Oil and natural gas prices can fluctuate dramatically and quickly. Yet, some companies in this sector, like Chevron, are structured to withstand such swings while keeping dividend investors satisfied. Chevron’s high yield really sets it apart.

Chevron is unique as an integrated energy company, covering operations from upstream oil and gas production to midstream pipelines and downstream refining. Each segment behaves slightly differently depending on the energy cycle, which helps to buffer the impact of price changes across the board.

Additionally, Chevron boasts a robust balance sheet, with a debt-to-equity ratio around 0.22. That’s low, especially for a company of its size. This aspect allows Chevron to take on debt if needed during downturns, ensuring cash flow to maintain business operations and dividends. Historically, when commodity prices rebound, debt levels tend to decrease again.

Thanks to these financial strengths, Chevron has managed to increase its dividend for an impressive 38 consecutive years. Considering the volatility of the energy market, that’s quite the achievement. Plus, its 4.5% yield surpasses not just the industry average of 3.2% but also the S&P 500’s average of 1.1%.

Enterprise Products Partners: Shields from Price Volatility

If you’re looking for even higher yields, Enterprise Products Partners is a candidate worth watching. This master limited partnership (MLP) currently offers a distribution yield of 6.8%, having raised distributions every year for the last 27 years—coinciding with its tenure in public trading.

Enterprise focuses on the midstream sector, which tends to be the most stable segment in energy. By owning crucial infrastructure like pipelines and storage facilities, they can transport oil and natural gas globally. Their model emphasizes the amount of product being moved, rather than the price it fetches, ensuring strong cash flow generation.

Enterprise has a distributable cash flow that covers its distributions by a comfortable margin of 1.7 times, providing a cushion against potential challenges. It also holds an investment-grade balance sheet, suggesting it could access capital if necessary. Moving forward, it seems more likely that dividends will continue to rise than be cut.

However, investing in an MLP comes with its own complexities. They often don’t align well with tax-advantaged retirement accounts like IRAs, and there are additional tax filings to consider, particularly K-1 forms come tax season. But for those who are serious about dividends, the extra yield might justify the hassle.

Solid Choices Amid Fluctuations

Considering how crucial oil and natural gas are to our daily lives, it makes sense for most investors to dip their toes into the energy sector. Both Chevron and Enterprise provide dividend-seeking investors a means to participate without taking excessive risks. If pressed to choose, Enterprise likely represents the safer investment, but those wanting direct exposure to oil might prefer Chevron.