Despite the volatility the broader market has experienced in recent months, the S&P 500 index (SNPINDEX: ^GSPC) is still at lofty levels. The dividend yield is a miserly 1.3% or so. You can do better than that with an index fund focused on the out-of-favor energy sector, but even there, the average yield is "only" around 3.5%. You can do much better with Chevron(NYSE: CVX), TotalEnergies(NYSE: TTE), and Enterprise Products Partners(NYSE: EPD), which offer yields of up to 6.6%.
1. Chevron is a reliable dividend stock
The energy industry tends to be volatile, given the volatile nature of oil and natural gas prices. But Chevron has managed to ride the ups and downs in relative stride, having now increased its dividend annually for 38 consecutive years. With oil relatively weak today, the company's stock price has fallen and the yield has risen to an attractive 4.8%. That's well above the average energy stock.
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Chevron's business model is the foundation of its success on the dividend front. First, the company's integrated model exposes it to the upstream (drilling for energy), the midstream (pipelines), and the downstream (chemical and refining). This diversification helps to soften the effect of the peaks and valleys the sector goes through. Second, Chevron has a strong balance sheet, with a debt-to-equity ratio of around 0.2x today. That would be a low level of leverage for any company, but the key is that it gives management the leeway to lean on the balance sheet during hard times so it can continue to support its business and the dividend.
If you are looking for broad exposure to the energy sector, Chevron is usually one of the more attractive options available. And today, given its relatively high dividend yield, it is more attractive than usual.
2. TotalEnergies adds clean energy to the energy mix
TotalEnergies, which has a 6.5% dividend yield, is also an integrated energy major, like Chevron. So the two companies share a basic business model. That said, the French energy giant tends to carry more debt, so the balance sheet isn't quite as strong. Management also carries more cash, so the net debt-to-equity ratio is on par with Chevron. That's reassuring, but it still isn't the same thing as having less debt. There is a bit more balance sheet risk with TotalEnergies.
Yet there's a reason, beyond the higher yield, that income investors might prefer TotalEnergies over Chevron. That goes back to the integrated approach. Chevron has largely stuck to its oil and natural gas roots. TotalEnergies has been building a business around electricity and clean energy. Basically, it's using the profits from dirtier carbon fuels to invest in the energy niche that is increasingly displacing those fuels. If you like the idea of Chevron but prefer a clean energy hedge, TotalEnergies will be a no-brainer high-yield switch-out for you.
If you like the yields on offer from Chevron and TotalEnergies, but you just can't get past the exposure to volatile commodity prices, don't worry. There is still a high-yield energy opportunity for you in the form of midstream giant Enterprise Products Partners, which has a lofty 6.6% or so yield backed by 26 annual distribution increases. The key here is that this master limited partnership (MLP) is just a toll taker.
Enterprise owns the infrastructure (midstream assets) that helps move oil and natural gas from where it is produced to where it is used. It charges fees for the use of these assets, so demand for energy is more important than the price of energy to Enterprise's top and bottom lines. Energy demand tends to remain robust regardless of energy prices, given the importance of power to the modern world. So Enterprise tends to produce reliable cash flows through the entire energy cycle. That allows it to support its large and growing distribution.
The one problem with Enterprise for some investors will probably be its growth profile, which is basically as exciting as watching a tortoise "run." However, given the high yield, investors focused on maximizing the income they generate probably won't care too much about that issue.
Don't settle for average -- you can do better
If you're looking for energy exposure, you could simply buy an index-based ETF, settling for a yield of around 3.5%. That's not exactly bad given the painfully low yield of the broader market. However, you can do better with well-run integrated energy giants Chevron and TotalEnergies. Meanwhile, you can sidestep commodity risk and still collect a lofty energy-related yield with Enterprise Products Partners. As little as $500 could get you started in each of these high-yield energy investments.
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Reuben Gregg Brewer has positions in TotalEnergies. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
