Want Decades of Passive Income? 4 Energy Stocks to Buy Right Now
April 26, 20263 Mins read121
Share
The geopolitical conflict in the Middle East has reduced global oil and natural gas supplies. When supply is reduced in a commodity market, prices rise. When commodity prices rise, companies that produce those commodities generate larger revenues and earnings.
If you are a dividend investor looking at energy stocks today, you need to remember that an end to the Middle East conflict will likely reverse all of that. Increased supply will lead to lower commodity prices and lower revenue and earnings for energy companies. Dividend investors need to stick with companies that have proven they can keep paying shareholders well through the entire energy cycle. Here are four businesses that have done just that.
Will AI create the world’s first trillionaire? Our team just released a report on a little-known company, called an “Indispensable Monopoly,” providing the critical technology Nvidia and Intel both need.
If you want to avoid risk, the best place to look for income in the energy sector is the midstream. Businesses here own energy infrastructure, such as pipelines, storage assets, and transportation facilities. They tend to charge fees for the use of the assets they own, meaning the volume passing through their systems is more important than the price of what is being moved. Since oil and natural gas are vital to the functioning of the world, demand for these commodities tends to remain robust regardless of prices.
Two of the most reliable income investments in the midstream niche are Enterprise Products Partners(NYSE: EPD) and Enbridge(NYSE: ENB). Enterprise, a master limited partnership, has increased its distribution for 27 consecutive years. Enbridge has increased its dividend, in Canadian dollars, for 31 years. Neither company is particularly exciting, but both have industry-leading positions in North America. That’s a secondary bonus, as they operate far away from the Middle East tensions.
Enterprise has a distribution yield of 5.7%, and Enbridge’s dividend yield is 5.4%. Neither is a particularly fast-growing business, but dividend investors looking to maximize income will likely appreciate these boring but reliable high-yield midstream options in the typically volatile energy sector.
Some investors actually want greater direct exposure to oil and natural gas, given their importance to the global economy. Dividend investors should focus on integrated energy giants like ExxonMobil(NYSE: XOM) and Chevron(NYSE: CVX). One important reason for favoring these two energy giants is their industry-leading financial strength. Exxon’s debt-to-equity ratio is a super-low 0.19x, while Chevron’s is just a touch higher 0.25x.
Rock-solid balance sheets give Exxon and Chevron the leeway to take on debt during energy downturns, enabling them to continue supporting their businesses and dividends until commodity prices recover. They have both increased their dividends annually for decades despite the inherent volatility of the energy sector.
An additional positive is the integrated business model. They each have exposure to the full energy value chain. And they also have globally diversified portfolios. Different segments of the industry perform differently through the cycle, and different regions of the world can perform differently, too. Being diversified likely limits the upside for Exxon and Chevron, but it also softens the blow when oil and gas prices are falling. If you are a long-term dividend investor, that’s a good reason to buy into Exxon’s 2.7% yield or Chevron’s 3.8%.
To be fair, you’d get a better price and higher yield if you waited for an energy downturn. But if you feel you want to buy an energy stock, Exxon and Chevron are pretty much always solid options for dividend lovers.
Oil and natural gas are important to the world, and most investors should have some exposure to energy. However, dividend investors need to be extra cautious given the inherent volatility of the commodity-driven sector. Stick with high-yield stocks like Enterprise, Enbridge, Exxon, and Chevron, which have all proven they can pay you well through the good times and the inevitable bad ones, too.
Before you buy stock in Chevron, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Chevron wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Netflix made this list on December 17, 2004… if you invested $1,000 at the time of our recommendation, you’d have $498,522!* Or when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $1,276,807!*
Now, it’s worth noting Stock Advisor’s total average return is 983% — a market-crushing outperformance compared to 200% for the S&P 500. Don’t miss the latest top 10 list, available with Stock Advisor, and join an investing community built by individual investors for individual investors.
Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Chevron and Enbridge. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
Leave a comment