If you are a dividend investor looking at the energy sector as the new year gets underway, you’ll want to consider Enbridge (NYSE: ENB), ExxonMobil (NYSE: XOM), and Devon Energy (NYSE: DVN). All of them offer material yields, but each serves a different purpose in a diversified portfolio. Here’s a quick rundown on what you need to know to get started.
1. Enbridge is a reliable middleman
The energy sector is broken into four broad areas: upstream (energy production), downstream (chemicals and refining), equipment & service contractors, and midstream (pipelines). The first three can be highly volatile, while the fourth, midstream, is boring.
That’s where Canada’s Enbridge sits, with a massive collection of energy infrastructure assets spread across North America. It charges fees for the use of its assets, or they are regulated or contract-based (it owns a natural gas utility and has some clean energy exposure).
The boring nature of the company’s business is highlighted by its 28 consecutive annual dividend increases. The dividend yield today is a very attractive 7.4%, which will entice investors looking to maximize current income. The trade-off is that the yield is likely to make up the lion’s share of total return, with only slow business growth likely in the future.
Indeed, the company’s recent agreement to buy three regulated natural gas utilities from Dominion Energy (NYSE: D) cements the slow growth view. Distributable cash flow growth is expected to be around 3% through 2025 and 5% thereafter, neither of which will light anyone’s world on fire. However, slow and steady (and high yield) could be just what some investors are looking for.
2. ExxonMobil rides the wave like a pro
ExxonMobil’s claim to fame on the dividend front is its 41-year history of annual dividend increases. That’s so incredible because oil and natural gas are highly volatile commodities prone to swift, and often dramatic, price swings.
For more than four decades, Exxon has survived them all in relative stride. The current dividend yield is around 3.8%, which isn’t huge, but is more than twice what you’d get from an S&P 500 index fund.
There are two keys to Exxon’s success. The first is its diversified business model, with assets spanning across three areas of the energy sector (upstream, midstream, and downstream). That helps to soften the blow when times are tough, though in fairness it can also limit upside when times are good. Most dividend investors will probably see that as a fair trade-off.
The second notable factor here is the company’s balance sheet. Exxon’s debt-to-equity ratio is a modest 0.2 times today. That gives it the leeway to take on debt to support its business and dividend during a period of low oil prices. When prices recover, as they have historically, leverage is reduced.
If you are looking for oil exposure and a reliable dividend, Exxon is one of your best options.
3. Devon’s dividend is volatile by design
Devon Energy is an acquired taste that won’t be right for most investors. The reason for this is that the company’s dividend is tied to performance, so it rises and falls over time. And the company operates exclusively in the upstream space, which is the most impacted by energy price swings.
To put some numbers on this, the dividend was $1.55 per share in the third quarter of 2022, but fell to $0.49 per share in the third quarter of 2023. The dividend yield today is 6.3%, but that’s not a figure you can really count on, given the variable dividend policy in place today.
If you need consistent income, you don’t want to own Devon. But if you are a bit more aggressive and active, it could provide a hedge against real-world energy prices. Essentially, just when you are likely to be paying more for gasoline and heating fuel, Devon’s dividend is likely to be increasing.
Of course, the dividend will also be falling as your energy costs decline as well. While not for every investor, some might find the variable dividend policy a good fit for an otherwise diversified income portfolio.
Three ways to invest in dividends in the energy patch
There is no right way to invest — it all depends on the type of investor you are. If you like big yields from boring companies, Enbridge is worth a deep dive in January. If you are looking for oil and natural gas exposure but don’t want to sacrifice a reliable income stream, Exxon is a great choice. And if you want a way to hedge your real-world energy costs and don’t mind a little dividend volatility, Devon could be just what you want.
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Reuben Gregg Brewer has positions in Dominion Energy and Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool recommends Dominion Energy. The Motley Fool has a disclosure policy.
3 Dividend Stocks to Buy Hand Over Fist in January was originally published by The Motley Fool