Buying dividend-paying stocks has long been a masterful way of generating superior returns. Sure, solely buying income-generating stocks means you would have missed out on some of the stock market's most successful companies, such as Amazon.com and Netflix, which don't pay dividends but since 2002 have risen 17,500% and 49,400%, respectively, compared to the S&P 500's 309% gain.
Even so, over the last five decades, dividends have accounted for most of the stock index's total return, with price appreciation representing just 22% of the market returns versus 78% generated by dividends.
Income investors, though, can't just go chasing yield, since rising yields represent an increasing amount of risk. That's why you should consider the three energy stocks below, which offer dividend-seeking investors the perfect combination of growth potential, value, and income.
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Chevron
Like many large oil companies, Chevron (CVX 1.49%) suffered big losses during the early months of the pandemic. As economic activity around the world all but came to a standstill and demand for oil plunged, this energy giant engineered dramatic cost-cutting initiatives while also making opportunistic acquisitions of Noble Energy and Noble Midstream Partners.
Preserving its dividend was also a priority. The company has raised its payout for more than 25 consecutive years, making it a Dividend Aristocrat. Chevron CEO Mike Wirth says he prefers to return money to shareholders instead of taking on new capital-intensive projects outside its core competencies, such as solar and wind power projects. The dividend currently yields 5.3% annually.
That focus has kept Chevron's debt-to-equity ratio the lowest among its peers, even though it carries some $43 billion worth of debt on its balance sheet. Because the oil giant is also one of the biggest vertically integrated energy leaders with both upstream and midstream assets, it's still able to generate considerable cash flows, even during extreme global crises.
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Enterprise Products Partners
Although we're feeling the effects of oil-production cuts at the gas pump, investors can still reap the reward of an investment in Enterprise Products Partners (EPD +0.37%). It's one of the largest publicly traded partnerships and a leading North American provider of midstream energy services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, refined products, and petrochemicals.
It operates some 50,000 miles of pipelines throughout the U.S., offers some 14 billion cubic feet of natural gas storage, and boasts 260 million barrels of storage capacity for NGLs, crude oil, refined products, and petrochemicals. It also has 21 NGL processing plants.
Enterprise's broad footprint could be a problem in a downturn except that its revenue mostly comes in the form of long-term, fixed-fee, or take-or-pay contracts, which let the midstream operator get paid regardless of whether its customers accept delivery of the product or not. These contracts make for a very stable revenue stream and offers predictable cash flows, which have allowed Enterprise to raise its dividend for 22 consecutive years.
Not quite Dividend Aristocrat status yet, but with its payout yield of 8.4% annually, this is a smooth operator to check out.
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ExxonMobil
Although the push for renewable energy continues, fossil fuels are going to be with us for years to come. That doesn't mean massive economic upheavals like the pandemic won't impact oil companies like ExxonMobil (XOM 1.26%), which ever so briefly gave up the title of biggest energy giant to Chevron; the two even discussed the possibility of a merger during the downturn. But the fact it took a worldwide catastrophe to inflict pain indicates the enduring nature of the business.
Like Chevron, though, Exxon is also engaging in significant capital cost-cutting initiatives to rein in costs, not least because of shareholder pressure to improve returns. It slashed its annual investment plans from a previous level of $30 billion to between $20 billion and $25 billion a year from 2022 to 2025. It's also selling off assets in Europe, Africa, and Asia that could net some $25 billion, which it would use to invest in the Permian Basin and Guyana where the payoffs could be greater.
Investments in energy companies have not offered favorable returns over the past decade. Reuters recently noted that since the beginning of 2015, even when including dividends, investors have a compound annual loss of 2.5% compared to 14.4% average annual gains in the S&P 500.
Yet low oil supplies, increased demand, and no indication by OPEC countries they plan on increasing output anytime soon serve to bolster the bottom line of Exxon and other energy firms. With its dividend yielding 6% annually, it's a stock to ride higher in October.
