There’s one key aspect of the energy sector that you can’t ignore: oil and natural gas prices are very volatile. That means going in with your eyes open to the risks, even when energy prices are high. But income investors needn’t worry since there are multiple ways to earn dividends in the energy sector and one of them is likely to be right for you, whatever your appetite for risk.
Here’s why you’ll want to take a close look Enterprise Product Partners (NYSE:EPD), Chevron (NYSE: CVX)And Devon Energy (NYSE:DVN) as the month of May begins.
Enterprise helps move it all
The energy sector is broadly divided into three segments: the upstream sector, which deals with oil and gas production; downstream, which concerns refining and chemicals; and the intermediate canal, which connects upstream to downstream.
Midstream companies, like the one operated by Enterprise Products Partners, typically charge fees for the use of vital resources. pipeline, the transport, storage and processing assets they own. The price of raw materials flowing through its system is not as important as energy demand, which tends to remain robust even when oil prices are low.
The fees Enterprise charges provide it with a reliable cash flow to pay distributions. The Master Limited Partnership (MLP) has increased its distribution every year for 25 consecutive years. Meanwhile, the distribution was covered 1.7 times by distributable cash flow in Q1 2024, meaning there is little risk of distribution reductions.
The huge 7.4% distribution yield is likely to account for the majority of an investor’s return over time, but if you’re looking for a big yield in energy, Enterprise Products Partners is a good fit to get it.
Chevron is the “safe” way to invest in oil
While Enterprise tries to avoid the riskiest aspect of the energy sector, Chevron tries to reduce risk in a different way. To begin with, it has diversified its activities into all three segments of the industry. Upstream, midstream, and downstream sectors all tend to have different business dynamics, which helps mitigate the impact of the ups and downs inherent in energy markets over time.
Oil prices will remain the main determinant of Chevron’s results, but the fluctuations will not be as large as they would be for a purely upstream or downstream company.
Additionally, Chevron has one of the strongest balance sheets among its integrated energy sector peers, ending 2023 with a debt-to-equity ratio of just 0.12. If oil prices collapse, it will have enough room to take on debt to continue financing its operations and shareholder dividends.
This is where Chevron’s impressive streak of 37 annual dividend increases comes into play. The energy sector has seen wild swings over the past three decades, including during the coronavirus pandemic, when the U.S. oil prices actually fell below zero at one point. Even so, Chevron continued to support its dividend, rewarding investors for…
