Crude oil prices have strengthened a bit since the start of November. Energy stocks followed the rise in oil prices, with the sector outperforming the broader market in almost the last month and a half. Though energy stock prices are mostly dependent on the vagaries of oil prices, many of them offer a steady and growing dividend stream. Here are five top dividend stocks that are currently available on sale.
Integrated energy giant: Chevron
Chevron (CVX -0.50%) stock has fallen roughly 25% so far in 2020 and is trading at an attractive dividend yield of around 5.8%. The coronavirus pandemic severely impacted the demand for oil and oil products in March and April, and it hasn't recovered to pre-pandemic levels yet. Lower demand coupled with an excess supply sent oil prices down while hurting the performance of energy companies, including Chevron.
During the year, Chevron's earnings from its oil and gas production operations fell, largely due to lower oil prices. At the same time, its downstream earnings were hit by lower refining margins. The company has been reducing its operating and capital expenditures in response to market demand. Chevron has the strongest balance sheet among its top peers, which positions it well to weather the challenging market until the time oil demand and prices improve. That makes its attractive yield safe, too.
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Top midstream MLP: Enterprise Products Partners
Pipeline MLP Enterprise Products Partners (EPD 0.65%) is one of the energy companies that was least affected by the recent turmoil in commodity prices. Enterprise Products' diversified operations and fee-based contracts help it generate fairly consistent cash flows irrespective of oil and gas prices. In the third quarter, the company generated distributable cash flow (DCF) of $1.6 billion -- flat compared to the year-ago quarter.
Another key factor that sets Enterprise Products apart from its peers is its financial discipline. With a debt-to-EBITDA ratio below four times, it is one of the least leveraged midstream operators. The company's DCF was 1.7 times its distributions for the third quarter. Diversified fee-based cash flows, conservative leverage, and strong distribution coverage mean that the company can easily maintain its above-8% yield. The stock is down roughly 25% year to date, offering an attractive entry point for long-term investors.
Gas-focused midstream giant: Kinder Morgan
For investors not interested in MLPs because of the tax headaches that come with owning a partnership, Kinder Morgan (KMI 0.22%) offers an attractive option to invest in the energy pipeline and infrastructure segment. The company moves roughly 40% of the natural gas consumed in or exported from the U.S. Natural gas is expected to continue to be a key element of the world's energy mix, as energy demand from emerging economies continues to rise.
A major chunk of Kinder Morgan's cash flow is backed by take-or-pay and fixed-fee contracts that ensure the company's revenue is steady regardless of commodity prices or how much customers use its pipelines. Similarly, the bulk of the remaining cash flow is hedged, with just 2% exposed to commodity prices. That minimizes the impact of commodity price fluctuations on the company's cash flows. Kinder Morgan's third-quarter DCF was 1.8 times its dividends for the quarter.
Looking ahead, Kinder Morgan intends to raise its 2021 dividends by 3%. Though lower than what the company has long been promising, the modest increase looks like a sound strategy, considering the stock's already high yield as well as weak market conditions. Kinder Morgan can use the extra cash to reduce its debt load or repurchase shares. The stock is down 32% so far in 2020 and offers a generous yield of more than 7%.
Canadian midstream company: Enbridge
With 25 consecutive years of dividend growth, Enbridge (ENB 0.07%) is easily any dividend investor's dream stock. The company expects to continue this streak with a 3% dividend hike in 2021. Enbridge's diversified operations with fee-based cash flows set it up it well for consistent growth. Despite the negative impacts of the pandemic, Enbridge expects to meet its 2020 DCF guidance.
EPD Dividend Yield data by YCharts
Enbridge expects to grow its DCF by 5% to 7% through 2022, thanks to its recently completed and upcoming growth projects. The stock's 16% fall year to date offers a great entry point for long-term dividend investors. It's trading at a yield of more than 7%.
Top refiner: Valero Energy
An unfavorable refining market environment has pressured prices of refining stocks significantly this year. Valero Energy (VLO 0.73%) stock has fallen nearly 40% from its price at the start of 2020. It offers an attractive yield of nearly 7%.
One key factor that sets Valero apart from its peers is its lower cash operating expenses per throughput barrel. If refining margins remain squeezed for much longer, there is a possibility that other refiners will need to shutter higher-cost facilities. However, Valero's lower operating costs better position it to weather the tough market conditions.
Moreover, Valero's renewable diesel operations could potentially be a significant growth avenue for the refiner. The demand for renewable diesel continues to rise with a greater governmental thrust toward renewable energy.
