Energy is vital to modern society, and most investors should probably have some exposure to the sector. The problem is that the sector tends to be very volatile, given its commodity-driven nature. But if you have $500 to invest, you might want to consider putting it into this quartet of energy giants, all of which pay reliable dividends.
Go in with your eyes wide open
Carbon-based fuels like oil and natural gas are vital to the world and will likely remain important for decades to come, but they are commodities nonetheless. Supply and demand, economic growth, and geopolitical developments can all play havoc with energy prices.
The price swings can be swift and dramatic at times. Investors need to come to grips with this when looking at energy related stocks.
Image source: Getty Images.
That said, the energy sector is broken down into three broad groupings. The upstream group is filled with energy producers, the midstream contains pipeline companies, and the downstream is where chemical and refining businesses reside.
Each segment has its own dynamics, with the upstream and downstream both commodity focused, and the midstream filled with toll-takers that provide more consistency. Choose wisely and you can turn your $500 investment into a reliable income stream.
Go big or go home with Exxon and Chevron
For most investors looking to add some energy exposure, the best option will be an integrated energy major like ExxonMobil (XOM -1.67%) or Chevron (CVX 0.47%). Both companies have increased their dividends for decades, proving they know how to survive through the energy cycle while reliably rewarding investors along the way. There are two factors that are vitally important to this success.
First, both Exxon and Chevron have very strong balance sheets. That gives them the leeway to take on leverage during industry downturns so they can keep funding their businesses and their dividends until oil prices recover. (Historically, oil prices have always recovered.)
Second, Exxon and Chevron have exposure to the entire energy sector and globally diversified portfolios. Having such broad exposure helps to soften the peaks and valleys inherent in the industry. While neither of these two industry leaders is going to provide as much upside during an industry rally as a pure-play driller, the downside will likely be less dramatic. That's a good compromise.
Exxon is yielding roughly 3.6% today, and Chevron's yield is 4.3%. Chevron is probably the more attractive valuation wise, but either one is a good option for long-term and broad-based exposure to the energy sector.
Collect reliable dividends with Enterprise and Enbridge
That said, if you are an income focused investor, there's another way to go. As noted, the midstream segment of the energy sector is largely filled with toll-taker businesses.
Industry giants like Enterprise Products Partners (EPD 1.60%) and Enbridge (ENB 0.87%) own massive portfolios of energy infrastructure assets that are likely irreplaceable. These are the pipelines, storage, processing, and transportation assets that help to move energy commodities around the world. Enterprise and Enbridge essentially charge their customers fees for the use of the vital infrastructure they own.
This tends to produce reliable cash flows through good energy markets and bad ones. Indeed, demand for energy is more important than the price of energy for Enterprise and Enbridge.
That demand tends to remain strong no matter what the price of oil is at any given time. That's how these two midstream players have managed to increase the income they have handed out to investors each and every year for decades.
That's attractive, of course, if you like reliable dividends, but the real standouts here are the yields that Enterprise and Enbridge offer. Enterprise, a master limited partnership (MLP), has a lofty 6.5% yield right now. Canadian midstream giant Enbridge's yield is 6.1%.
If you are looking specifically for high-yield energy stocks, Enterprise and Enbridge should be on your short list today.
You have to know your way around the energy patch
Although the energy sector is volatile, the vital nature of the products it provides the world suggests that every investor should have some exposure. That's true if you have $500 or $5 million to invest.
But you should make sure you put your money to work in the best possible investments. Exxon and Chevron are great options if you want broad industry exposure. Enterprise and Enbridge are sound choices for dividend investors who want to cherry-pick reliable high-yield options.
