Energy is vital to the world economy, and these two dividend stocks can get you exposure while minimizing risk in the highly volatile sector.
Conservative income investors often shy away from sectors that are volatile, such as energy. But that isn’t always the right move, since even volatile sectors can be economically important. A better choice with the energy sector is to pick businesses like Chevron (CVX 0.47%) and Enterprise Products Partners (EPD 1.11%) that address energy price volatility in a way that protects the high-yield income streams they throw off. Here’s what you need to know.
Energy is too important to ignore
Most people in the developed world take reliable access to energy for granted. But if you had to go without gasoline (derived from oil) for your vehicle or natural gas for your heating needs, you would be very distraught. And it isn’t just you who would be impacted, since these commodities are vital for everything from generating electricity to delivering groceries to the store where you shop. Most investors should have some exposure to energy stocks because of energy’s importance to the global economy.
Image source: Getty Images.
The problem is that oil and natural gas prices can and do swing dramatically, and sometimes swiftly, up and down. That leads to a high degree of variability on both the top and bottom lines of energy companies’ income statements. If you are conservative and trying to build a reliable income stream from dividend stocks, you might be tempted to skip the energy sector. You don’t have to do that if you choose carefully.
Chevron: Get it all in one shot
Chevron is probably one of the best options for dividend investors looking to get broad exposure to the energy sector. It uses an integrated business model, which simply means it has exposure across the entire energy value chain. So, in a single investment, you have the upstream (oil and natural gas production), the midstream (pipelines), and the downstream (chemicals and refining). Each segment of the industry operates a little differently through the energy cycle, so having exposure to all of them helps to mute the swings to which investors are exposed.
Today’s Change
(-0.47%) $-0.73
Current Price
$153.31
Key Data Points
Market Cap
$315B
Day’s Range
$152.12 – $153.75
52wk Range
$132.04 – $168.96
Volume
195K
Avg Vol
7.4M
Gross Margin
12.74%
Dividend Yield
0.04%
To be fair, the stock price will still rise and fall along with energy prices. But conservative dividend investors have been rewarded with annual dividend increases for 38 consecutive years. Add in the 4.3% dividend yield on offer today, and you can see where this might be a good option for adding energy exposure to your dividend portfolio.
But there’s one more fact you need to know about, and it is hidden in plain sight on the company’s balance sheet. Chevron operates with extremely low leverage, with a debt-to-equity ratio of around 0.2x at the midpoint of 2025. That would be low for any company, but in this case, it serves a very important purpose. When energy prices are weak, Chevron can take on leverage so it can keep funding its business and dividend. When energy prices recover, as they always have historically, leverage is reduced in preparation for the next energy downturn. In other words, Chevron is built to survive the energy cycle while rewarding dividend investors well for sticking around.
Enterprise: Sidestepping the risk
Don’t fret if Chevron’s exposure to commodity prices is still too much of a concern for you. You can skip that exposure and still collect a hefty 7% yield with Enterprise Products Partners. This master limited partnership (MLP) isn’t going to provide huge growth, so the yield is going to make up the lion’s share of your returns over time. But if you are a dividend-focused investor, that probably won’t bother you.
The big selling point for that lofty yield, however, is that Enterprise’s business isn’t directly exposed to energy prices. Operating in the midstream, the MLP charges customers for the use of its energy infrastructure assets. It owns things like pipelines, storage, processing, and transportation assets. The volume of oil and natural gas flowing through its system is more important than the price of those commodities. Given the importance of energy to the world economy, as highlighted above, demand for energy tends to remain strong regardless of the price of oil and natural gas.
Enterprise Products Partners
Today’s Change
(-1.11%) $-0.34
Current Price
$30.22
Key Data Points
Market Cap
$66B
Day’s Range
$30.09 – $30.58
52wk Range
$27.77 – $34.63
Volume
5.6M
Avg Vol
4M
Gross Margin
12.73%
Dividend Yield
0.07%
That’s how Enterprise has managed to increase its distribution annually for 27 consecutive years. Backing that streak up is an investment-grade-rated balance sheet and the fact that trailing-12-month distributable cash flow covers the distribution by a healthy 1.7x or so. A lot would have to go wrong before Enterprise’s distribution would be at risk. And, based on the business model, falling energy prices won’t likely be the issue that precipitates a distribution problem.
Get your energy without all the energy price risk
Chevron is the way to go if you are looking for direct energy exposure while trying to limit the impact you’ll feel from energy volatility. Enterprise is the better choice if you are super conservative or focused heavily on maximizing the income your portfolio generates. Either one, however, would be a no-brainer way to invest in energy while also sleeping well at night.