High yields are often found in sectors that are out of favor, which is why you can get some pretty impressive dividends from the energy sector today. There are definitely headwinds here, including the broader shift toward cleaner alternatives, but oil and natural gas are expected to remain vital energy sources for a long time to come.
Which is why, if you can deal with collecting big dividend checks from unloved stocks, you should consider Chevron (CVX 0.37%), Enterprise Products Partners (EPD 0.45%), and, at the lower end of the yield spectrum, Helmerich & Payne (HP -0.12%).
The strongest energy giant
Chevron is one of a small group of massive global companies that have integrated assets spanning from the upstream (drilling) to the downstream (chemicals and refining) areas of the energy industry. It has increased its dividend annually for an incredible 33 consecutive years, making it a Dividend Aristocrat. And while 2020 was a tough year, given the declines in demand resulting from the efforts to contain the spread of the coronavirus, Chevron muddled through in stride. It wasn't exactly a good year, but it didn't cut its dividend like peers Royal Dutch Shell and BP.
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One of the key things that sets Chevron apart is the strength of its balance sheet. The company's debt-to-equity ratio of 0.33 times is the best among its brethren. And while it added debt to its balance sheet in 2020 to help it get through the year, it simply had (and still has) more room than its peers to do so.
Oil prices have recovered from their worst levels in 2020, but Chevron is still yielding a very generous 5% or so, toward the high side of its historical yield range (suggesting a bargain price). Yes, you can find higher yields in the integrated-majors space, but you won't find one that's backed by a company as strong as Chevron.
Happily stuck in the middle
Up next is master limited partnership Enterprise Products Partners. The partnership is one of the largest midstream players in North America, with assets spanning the pipeline, storage, and processing spaces. It would be virtually impossible to recreate the portfolio of assets the partnership owns. The thing about midstream companies is that a good portion of their revenue comes from fees, with that figure at Enterprise in the high 80% range. That means it gets paid for the use of its assets, so energy price volatility isn't as big an issue.
This helps explain how Enterprise has amassed a 22-year streak of annual distribution increases. In 2020 it covered its dividend 1.6 times over, and the yield is a heady 7.8% right now. Like Chevron, the yield is on the high side and suggests the units are relatively cheap today. Meanwhile, also like Chevron, Enterprise has one of the strongest balance sheets in its industry, with its debt-to-EBITDA ratio of 4.1 times living at the low end of its peer group.
The partnership won't excite you with growth, but with a yield that high, slow and steady is a great outcome for investors looking to maximize the income their portfolios generate.
Honorable mention
Let's deal with the elephant in the room first: Helmerich & Payne cut its dividend in 2020 after decades of annual increases. So why even bring this name up? Well, the yield is 3.6%, which isn't huge on an absolute basis, but is still more than twice what you would get from an S&P 500 Index fund.
The stock, meanwhile, is around 75% below the peak achieved in 2016. It may never get back up to those heights, but it still represents a great turnaround story, assuming that the energy sector eventually recovers from the pandemic downturn and starts drilling again. Helmerich & Payne is an energy services company and has one of the largest onshore U.S. drilling fleets.
HP dividend data by YCharts.
There are a few things to like here, even though 2020 was a brutal year for the company and the energy services sector. First, like the two other names above, Helmerich & Payne has a rock-solid balance sheet, with a debt-to-equity ratio of just 0.15 times -- that's around half the level of its next closest peer. While it cut its dividend, it clearly has financial staying power.
Second, it has long focused on keeping its fleet of drilling rigs at the leading edge of technology. When drills do get back to work, Helmerich & Payne's highly efficient and flexible assets will be in demand.
And third, with only 37% of its drill rigs under contract, there's a lot of upside potential.
This isn't a name for conservative investors, despite its strong finances. But if you are willing to take on a little uncertainty, it looks like Helmerich & Payne will be able to struggle along until the next upturn. And when that upturn arrives, it could turn the company's fortunes around in a big way.
Hold your nose and hit buy
It isn't easy buying stocks in out-of-favor sectors, but sometimes it pays to grit your teeth and jump in anyway. Integrated energy giant Chevron and midstream goliath Enterprise are great options for even conservative investors, given their financial strength and diversified, resilient businesses. Helmerich & Payne is really a cyclical name that's mired in a deep downturn, but with a strong balance sheet it should make it through to the next upturn. For more-aggressive types, that spells turnaround appeal.
All three, meanwhile, offer generous income streams that will pay you well while you wait out the current industry headwinds.
