Finding high yields while the stock market is near all-time highs is hard, but not impossible. You just need to be careful and stick with financially strong companies with the size and scale to survive difficult business environments like the one that COVID-19 has brought about. On that score, these two high-yield stocks in the out-of-favor energy sector look like survivors. Meanwhile, you can collect historically high yields while you wait for the tough times to pass. Here's a primer on Chevron (CVX 1.54%) and Enterprise Products Partners (EPD 1.41%).
1. The cleanest balance sheet
Chevron is one of the world's largest integrated energy companies. It has increased its dividend annually for 33 consecutive years and, and today offers a yield of 5.6%, which is near a 30-year high. To be fair, the energy sector is deeply out of favor today, largely because demand has plummeted -- along with oil and natural gas prices as countries around the world effectively shut down to slow the spread of COVID-19. However, despite a massive supply/demand imbalance, oil and natural gas remain vital global energy sources. And the industry is slowly working to reduce supply, both voluntarily and via company failures.
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Chevron, meanwhile, has a rock-solid balance sheet and a globally diversified business. For example, the company's financial debt to equity ratio was roughly 0.25 times at the end of the first quarter. That's lower than those of any of its closest peers. The company's agreement to buy Noble Energy in an all-stock transaction, meanwhile, is a further sign of strength: The oil giant is basically looking to pick up good assets while others are just trying to survive. Noble will expand Chevron's U.S. position and broaden its reach in the Mediterranean. Meanwhile, the rest of the company's business spans from the upstream (drilling) space to the downstream (chemicals and refining) arena. Diversification is good for your portfolio, and it's good for a company's business, too.
There's no easy solution to the energy sector's problems, which will take time to fix. And buying Noble means taking on that company's debts (roughly $8 billion), which will have a slightly negative impact on its balance sheet. But this conservative industry giant is going to get through this difficult period, and there's a high likelihood that it comes out the other side a stronger company. Meanwhile, you get to collect a fat dividend that management continues to stand behind.
2. Moving things along
The next name up is master-limited partnership Enterprise Products Partners, which is currently offering a huge 9.5% yield (near the highest levels in its history). That distribution, meanwhile, is backed by over two decades of annual increases. And just as important, it boasts a massive and diversified midstream portfolio that would be difficult, if not impossible, to replicate. This is vital, because roughly 85% of Enterprise's gross margin is tied to fees, meaning it is getting paid to move products through its system. The price of what's flowing through its pipes, storage, and processing assets isn't the key factor -- volume is.
CVX Dividend Yield data by YCharts
To be fair, low oil prices and reduced economic activity because of the coronavirus will hit volumes. However, the partnership covered its distribution by 1.6 times in the first quarter, so it appears well-positioned to handle the adversity. That said, investors should expect that revenue will get hit by less demand for Enterprise's services, and growth may slow as customers pull back on their expansion plans (which reduces the need for more midstream infrastructure). However, the huge yield seems like decent compensation for those issues.
On top of all of this, Enterprise has a long history of operating in a conservative manner. That includes things like a focus on diversification and strong distribution coverage. But also notable is the partnership's modest use of leverage relative to peers. Financial debt to EBITDA was around 3.5 times at the end of the first quarter, which is toward the low end among its peer group. Investors looking for a way to sidestep the volatile nature of energy prices and still find a way to put some money into the energy sector would do well to take a closer look here.
Time for some deep dives
There's no such thing as a perfect investment, and both Chevron and Enterprise Products Partners have warts. But if you can look past the surface imperfections here, you'll find both have a lot to offer dividend investors. They are both worth closer looks today.
