Please ensure Javascript is enabled for purposes of website accessibility

Get Paid While You Wait: 3 Top Dividend Stocks in Energy

By Reuben Gregg Brewer - May 23, 2020 at 12:32PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The energy sector is dealing with an unprecedented shock, but that is opening up interesting opportunities for long-term investors.

The world is in a state of turmoil as people look to contain the spread of COVID-19, and one of the worst-hit industries is energy. But don't run for the hills. There are some interesting companies in the sector that have what it takes to survive this rough patch. They will likely thrive when this situation eventually passes. For those with a little moxie, it may actually be a good time to look at energy stocks Chevron Corporation (CVX -1.33%), Enterprise Products Partners (EPD 1.25%), and Total SA (TTE -0.52%).

1. A conservative giant

Chevron is one of the largest and strongest integrated energy companies on the planet. The best example of the company's strength is its rock-solid balance sheet, where financial debt to equity sits at roughly 0.25 times -- the lowest among its closest peers. Moreover, like its peers, Chevron's business spans from the upstream (drilling) space through to the downstream (chemicals and refining) sector, providing diversification to its business. To be fair, everything the company does is facing headwinds at the moment, since demand across the spectrum has fallen as countries basically shut down to slow the spread of COVID-19

An oil Well and two men writing in notebooks in the foreground

Image source: Getty Images.

With a solid balance sheet, however, Chevron can lean on its strong financial foundation to keep spending and supporting its fat 5.5% dividend yield; it has 33 years of annual dividend hikes. And it isn't sitting still. In fact, like the rest of the industry, it's pulling back on spending. The widespread pullbacks in the industry, meanwhile, will help to balance out supply and demand, and will eventually lead to higher energy prices. This downturn may be historically bad, but such volatility isn't unusual in the highly cyclical energy space. Meanwhile, oil remains an important global energy source, and will likely continue to be vital for many years to come. 

Chevron is basically in a strong position relative to peers. Past spending has been bearing fruit and pushing up production. Going into this downturn, the energy giant's spending was already relatively low and now this conservative oil major has simply gotten even more conservative. That means investors can collect a fat yield while waiting for this difficult cycle to pass, just like every energy downturn before it has. 

2. Happily stuck in the middle

Chevron's top and bottom lines are tied directly to oil prices, so there's still plenty of volatility ahead on the company's income statement. If that's too much for you to bear, then consider Enterprise Products Partners, one of the largest midstream players in North America. This master limited partnership owns a vast collection of pipelines, storage, transportation assets, and processing facilities, all of which help get oil and natural gas, and the products they get turned into, from the drill hole to end customers. It would be close to impossible to replicate Enterprise's portfolio. 

That size and diversification is an important differentiator, but even more important for income investors is the fact that roughly 85% of the partnership's top line comes from fees. Effectively, it gets paid for the use of its assets, with the often-volatile price of oil playing only a minor role in its cash flows. That's nice to know, but so, too, is the fact that Enterprise covered its distribution by 1.6 times in the first quarter. That should provide ample leeway for the partnership to muddle through this downturn without having to cut its distribution. Meanwhile, Enterprise has long been among the most conservatively financed midstream players in the sector, providing another layer of protection. 

EPD Dividend Yield Chart

EPD Dividend Yield data by YCharts

Yes, Enterprise is pulling back on capital spending, just like virtually every other energy company. That will likely slow growth, but survival is the big issue on investors' minds today. And if history is any guide, Enterprise will still be standing when the energy sector eventually recovers. To back that up, consider that the partnership's hefty 9.8% yield comes after more than two decades of annual distribution increases. Distribution growth has never been exciting, sitting in the low-to-mid-single digits -- but if slow and steady is your speed, then you need to do a deep dive here. 

3. Mixing things up

The last name on this list is a bit of a different story. French energy giant Total isn't one of the most conservatively financed companies in the industry. Its spending plans aren't particularly modest, either, though it is pulling back on capital spending just like its peers. In fact, if you look at Total as an oil and natural gas company, Chevron is really a better bet today. But there's a big difference between the two companies, beyond Total's much higher 8.2% yield. (Note that Total's dividend has remained the same or risen for 35 years running, which is impressive, but not quite as good a history as Chevron's.) 

Chevron is focused exclusively on oil and gas, but Total is working to expand its portfolio to include electricity. It started this shift years ago, and it's still pretty early in the process. But it has been willing to make some notable moves, including paying $1.6 billion in 2018 to buy a European utility. It just announced plans to acquire another utility operation in Spain, too, so increasing its diversification outside of its core oil business is obviously still a key priority. More to the point, it places Total in a position to provide the energy source that most believe will replace oil and natural gas over time. Put simply, this energy giant is working to transition today for the eventual disruption of its core business. 

That sounds like a pretty solid plan, with Total using its core operations as the foundation on which it builds for the future. And if that seems like a good compromise during a difficult period for energy stocks, then you should take a closer look at Total and its budding electric operation while the shares are still being beaten down because of its legacy oil business.

A hard sector to love

There's no question that the global market for oil and natural gas is in a state of disarray thanks to COVID-19. However, there are industry players that are built to survive this type of disruption, like Chevron and Enterprise. Because Wall Street fears the worst, you can collect fat yields while you wait for this painful cycle to run its course. Meanwhile, the negative sentiment has put Total on sale, too. And while it isn't quite as conservative as the other two names on this list, it is working to prepare for the world's long-term shift toward electricity. It wouldn't be too bad to collect Total's hefty dividend checks while you watch it make that transition.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Chevron Corporation Stock Quote
Chevron Corporation
$157.50 (-1.33%) $-2.12
Enterprise Products Partners L.P. Stock Quote
Enterprise Products Partners L.P.
$27.17 (1.25%) $0.33
TotalEnergies Stock Quote
$53.45 (-0.52%) $0.28

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/12/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.