A significant shift is occurring in the world today regarding energy. Simply put, more realistic plans to transition toward cleaner energy sources appear to be gaining traction. If the trend continues, it means that oil and natural gas will remain vital to the world's energy picture for longer than currently estimated. That could make these two high-yield energy stocks a great choice for income investors. Here's what you need to know.
Oil and natural gas aren't going anywhere for now
The fear of global warming has prompted governments worldwide to set ambitious targets for reducing greenhouse gas emissions. Given that carbon fuels are a big source of those gases, oil and natural gas were center stage, and not in a good way. However, the reality is that these energy sources are vital to the world's functioning.
Image source: Getty Images.
Even more notable, there's no quick, easy, or cost-effective way to replace oil and natural gas. The renewable power transition was always going to be a decades-long affair. Now it appears that governments are starting to admit this fact and, more importantly, address the reality of the situation. Even once influential and vocal supporters of change, such as Bill Gates, have materially softened their stance.
Given the improving backdrop for oil and natural gas, now could be a good time for dividend lovers to take a hard look at high-yielders like Chevron (CVX +0.04%) and Enterprise Products Partners (EPD 0.16%).
Chevron: Direct oil and gas exposure
Chevron is the better choice if you want to have exposure to oil and natural gas prices. The stock has a 4.6% dividend yield, and the dividend has been increased annually for 38 consecutive years. It is one of the largest energy companies on the planet.
There are two reasons why this is a great dividend choice, beyond the yield and dividend history. First, Chevron is an integrated energy company, meaning its business spans the entire energy value chain. Having diversified exposure across the upstream (energy production), the midstream (pipelines), and the downstream (chemicals and refining) helps mitigate the inherent volatility of the energy sector.
NYSE: CVX
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However, there are other integrated energy companies that compete with that same business model. Chevron's attractive because it layers that atop a rock-solid balance sheet, with a debt-to-equity ratio of just 0.22x. That would be low for any company, and it gives Chevron the wherewithal to support its business and dividend through the energy sector's normal business swings.
To be fair, ExxonMobil (XOM 0.11%) has a longer dividend streak and a lower debt-to-equity ratio. But Exxon's yield is also a full percentage point lower, too. That will likely make Chevron the smarter dividend stock for most investors, with $500 netting you roughly three shares.
Enterprise Products Partners: Avoid commodity risk
More conservative dividend investors may find that Chevron's oil and gas exposure makes its earnings a bit too volatile. If that's the case, you still have options. Enterprise Products Partners sidesteps commodity risk while still providing investors with a hefty 6.8% yield that is backed by 27 annual distribution increases.
The key here is that Enterprise operates in the midstream segment of the oil and gas industry. Midstream businesses own the energy infrastructure that facilitates the transportation of oil and natural gas worldwide. It is a toll-taker business, with the fees Enterprise charges its customers tied to the volume of energy it transports, not the price of oil and natural gas. The midstream tends to be the most stable and reliable segment of the broader energy industry.
NYSE: EPD
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There is a caveat here, however. Enterprise's lofty yield will likely make up the lion's share of an investor's total return. It is a slow and steady business that doesn't really have huge growth opportunities ahead of it. However, if you are focused on maximizing the income your portfolio generates, that probably won't be a problem for you. A $500 investment will allow you to purchase approximately 15 units.
Get in on the trend, buy Chevron and Enterprise
As the world appears to be softening its approach to the energy transition, you can get in on that change with high-yielding Chevron and/or Enterprise. Chevron will be the better choice for those who want direct exposure to energy prices. Enterprise will be most appropriate for investors who want to maximize income and minimize risk.
