It's hard to be a dividend investor today, given that the stock market is trading near all-time highs and the S&P 500 Index's yield is a miserly 1.3%. But don't despair, there are still some good options out there if you are looking to maximize the income your portfolio generates. Here are three names from the energy patch that still look like they are in the sale bin and offering generous yields despite their stock price increases this year.
1. A diversified giant
Chevron (CVX 1.62%) is one of the largest energy companies in the world, with a business that spans from the upstream (drilling) space, through the midstream (pipelines), and all the way to the downstream (chemicals and refining) sector. Although it doesn't always work out as planned, the hope is that when one area of the company is struggling, others will be doing well enough to offset the pain.
But Chevron doesn't stop there in its effort to keep risk at bay, it also has the strongest balance sheet in the integrated major peer group, with a debt-to-equity ratio of roughly 0.35 times -- a modest figure for just about any company. Meanwhile, the integrated giant's dividend has been increased annually for more than three decades, an incredible feat given the highly cyclical nature of the energy industry. The most recent hike was announced in late April.
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Basically, Chevron is a good option if you are looking for a relatively low-risk way to play the energy sector. Which brings us to the stock's dividend yield. While not the highest in its peer group, the 5% yield is still toward the high side of Chevron's historical range even after the stock's recent gains. That suggests that the shares are relatively cheap right now.
2. Happy to be in the middle
If you can handle a more focused business model in the energy sector, then you might want to look at midstream giant Enterprise Products Partners (EPD 1.79%). This master limited partnership is one of the largest owners of pipelines, storage, transportation, and processing assets in North America. It would be difficult, if not impossible, to replicate its portfolio of assets.
Most of its business is fee based, which means that demand for the products that flow through its system is more important than the price of those products. It is a fairly stable business. In fact, even in 2020 it managed to generate enough distributable cash flow to cover its distribution by a solid 1.6 times. Combine that with a long history of conservatively managing its balance sheet, and there's a lot to like here.
Which brings up the distribution yield, which is currently sitting at around 7.5%. That's toward the high side of its historical range. Note, too, that the distribution was increased in the first quarter, which should, unless something materially changes, extend its long streak of annual hikes to 25 consecutive years. That would make Enterprise a Dividend Aristocrat. There are caveats, notably that ground up construction is likely to slow in the years ahead because of the broader shift toward clean energy. But Enterprise is large and diversified enough that it should be able to shift toward acquisition-led growth in such an environment. This is a solid option for even conservative investors.
HP Dividend Yield data by YCharts
3. Counting on an upturn
The last name here is the most focused and the riskiest. Helmerich & Payne (HP 2.06%) provides drilling services to exploration and production companies. It owns a fleet of high-tech drill rigs that it rents out and operates. The last couple of years have been very difficult, with 2020 leading the company to cut its dividends after decades of annual increases. That was not an easy decision, but it was one that helped to preserve the company's industry-leading financial strength. Notably, its debt-to-equity ratio is the lowest of its direct peers at roughly 0.15 times. It has the financial strength to muddle through to better days as drilling activity slowly recovers.
The yield is only around 3.1% today, but that's still more than double what you'd get from an S&P 500 Index fund. And while risk-averse investors should probably avoid Helmerich & Payne, those willing to bet on a drilling turnaround might find it quite appealing now that oil prices are firming. Indeed, the stock is still down nearly 50% over the past three years.
The big story here is that just 45% of the company's drilling rigs are being used right now. So, assuming that drilling activity keeps improving, the stock is likely to recover more of the lost ground. And, given its previous history of returning cash to investors via dividends, it wouldn't be surprising to see dividend increases return in the future.
One might be right
It's probably not a great call to buy three stocks in the energy sector today, given the headwinds the industry is facing. However, one (or maybe two) wouldn't be a bad call. For dividend investors looking to maximize yield, Chevron or Enterprise would fit the bill, as both are large and financially strong names with historically generous yields. Chevron is the more diversified of the two, but Enterprise's fee-based business is more stable. Helmerich & Payne is really a turnaround story for those with a more adventurous streak. And while the yield isn't as high as the other two, a drilling recovery will likely have a pronounced impact on its business. Take the time to dig in and one, or more, of these high-yield energy plays may find its way into your portfolio today.
