2 High-Yield Energy Stocks to Buy Hand Over Fist and 1 to Avoid
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Energy is among the most volatile sectors on Wall Street, but there's a nuance to the industry that is very important. That's particularly true if you are a dividend investor in search of reliable high-yield stocks. A great example of a stock dividend investors might prefer to avoid is Devon Energy (NYSE: DVN), while Enterprise Products Partners (NYSE: EPD) and Enbridge (NYSE: ENB) are two options that could be well worth examining. Here's why.
Devon Energy is an upstream energy producer
A gushing oil well is the first thing that a lot of investors will think about when you say the words "energy sector." That's not wrong, per se. In fact, Devon Energy pretty much does exactly that, though it drills for both oil and natural gas. It's pretty good at it, too.
For starters, the company has a fairly low breakeven cost of $40 per barrel or so. That means Devon can remain profitable even when oil prices are somewhat weak. Then it has an over 10-year inventory of drilling opportunities ahead of it. This means it can both grow production and offset wells that are in natural decline. It also produces both oil and natural gas across multiple onshore U.S. energy regions, which helps to diversify its income stream as much as possible for a company that's focused on energy production. All in, Devon is a fairly well-run and respected energy producer.
The problem is that Devon's top and bottom lines are entirely dependent on the price of oil and natural gas. There's nothing an upstream focused company like Devon can do about that. And that means revenue and earnings can be very volatile because energy commodities can be very volatile. For dividend investors the story gets even more complicated because Devon Energy's dividend is designed to go up and down with its financial results. A variable dividend policy is a good way to ensure that shareholders are rewarded when energy prices are high. But, despite the 5% dividend yield on offer here, it is not a good thing if an investor is looking to create a consistent and reliable income stream.
Enterprise and Enbridge are cut from a different cloth
That said, the midstream is a very different segment of the energy sector. Big players like Enterprise and Enbridge own the energy infrastructure, like pipelines, that help to move oil and natural gas. They generally charge fees for the use of their vital assets. Since the energy sector couldn't operate without the assets such midstream providers own, they tend to generate very reliable cash flows. Notably, demand for energy is more important than the price of oil and natural gas. And demand for energy tends to be pretty robust even when energy prices are low.