Despite major technological advances, oil and natural gas are essential to the modern world.
Chevron offers a 4.6% yield and a 38-year history of consecutive dividend increases.
EPD has a yield of 6.8%, supported by 27 consecutive annual distribution increases.
10 stocks we like better than Chevron ›
A significant change is occurring in the world today when it comes to energy. Simply put, more realistic plans to transition to cleaner energy sources appear to be gaining ground. If this trend continues, it means that oil and natural gas will remain essential to the global energy landscape for longer than currently expected.
This could make these two high-yielding energy stocks a great choice for income investors. Here’s what you need to know.
Fear of global warming has pushed governments around the world to set ambitious targets for reducing greenhouse gas emissions. Since carbon fuels are a significant source of these gases, oil and natural gas take center stage, and not in a good way. However, the reality is that these energy sources are vital to the functioning of the world.
Image source: Getty Images.
Even more remarkably, there is no quick, easy, or cost-effective way to replace oil and natural gas. The transition to renewable energy was always going to be a decades-long affair. It now appears that governments are beginning to acknowledge this fact and, more importantly, to take into account the reality of the situation. Even once influential and vocal proponents of change, such as Bill Gates, have significantly softened their stance.
Given the improving backdrop for oil and natural gas, now may be a good time for dividend lovers to take a hard look at high-yielding companies like Chevron(NYSE: CVX) And Enterprise Product Partners(NYSE:EPD).
Chevron is the best choice if you want exposure to oil and natural gas prices. The stock has a dividend yield of 4.6% and the dividend has been increased every year for 38 consecutive years. It is one of the largest energy companies on the planet.
There are two reasons why this is a great dividend choice, beyond the history of yield and dividends. First, Chevron is an integrated energy company, meaning its operations span the entire energy value chain. Diversified exposure to upstream (power generation), midstream (pipelines), and downstream (chemicals and refining) helps mitigate the volatility inherent in the energy sector.
However, there are other integrated energy companies that compete with this same business model. Chevron is attractive because it layers this on top of a strong balance sheet, with a debt-to-equity ratio of just 0.22. That would be low for any company, and it gives Chevron the means to sustain its business and dividends despite normal fluctuations in the energy sector’s business.
To be fair, ExxonMobil has a longer dividend streak and lower debt-to-equity ratio. But Exxon’s performance is also one percentage point lower. This will likely make Chevron the smartest dividend stock for most investors, with $500 getting you about three shares.
More conservative dividend investors might find that Chevron’s exposure to oil and gas makes its earnings a little too volatile. If so, you still have options. Enterprise Products Partners avoids commodity risk while providing investors with a high yield of 6.8%, supported by 27 consecutive annual distribution increases.
The key here is that Enterprise operates in the midstream segment of the oil and gas industry. Midstream companies own the energy infrastructure that facilitates the transportation of oil and natural gas around the world. It is a fee-based business, with the fees Enterprise charges its customers tied to the volume of energy it transports, not the price of oil and natural gas. The midstream sector tends to be the most stable and reliable segment of the broader energy sector.
There is a caveat here, however. Enterprise’s high yield will likely account for the lion’s share of an investor’s total return. This is a slow and steady business that doesn’t really have huge growth opportunities ahead of it. However, if you want to maximize the income your portfolio generates, this probably won’t be a problem for you. An investment of $500 will allow you to purchase approximately 15 units.
As the world appears to be softening its approach to the energy transition, you can be a part of this change with high-efficiency Chevron and/or Enterprise. Chevron will be the best choice for those who want direct exposure to energy prices. Enterprise will be most suitable for investors who want to maximize income and minimize risk.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool ranks and recommends Chevron. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
The Smartest High Yield Energy Stocks to Buy with $500 Right Now was originally published by The Motley Fool
