Demand has swamped supply in the energy space as the global economy continues to pick up steam. That's led to a swift increase in energy prices, and a similarly rapid ascent in the prices of some energy stocks. But don't get too caught up in that near-term rise -- there are still some very attractive long-term opportunities for dividend investors looking at the sector. Here are two that should be on your short list: Enterprise Products Partners (EPD 0.48%) and Royal Dutch Shell (RDS.B).
1. Slow and steady
Enterprise Products Partners is a master limited partnership that operates in the midstream sector of the broader energy space. It owns a massive collection of pipeline, storage, transportation, and processing assets in North America that would be virtually impossible to replace or replicate. And, with an over-$50 billion market cap, it is easily one of the biggest names in the space, giving it economies of scale and the ability to undertake projects and transactions that smaller peers couldn't.
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However, what's most interesting about the midstream sector, and Enterprise's business, is that it is largely fee-based. Enterprise essentially gets paid for the use of its assets, like a toll collector on a highway, so the price of the commodities that pass through its system aren't all that important. Even as the world looks to shift away from carbon fuels, it appears that oil and natural gas will remain vital to the world economy for decades to come. And even as the world works to limit carbon fuel use, reducing the share of oil and natural gas, the size of the energy market is expected to increase because of global economic growth. So overall demand for these fuels may actually grow.
That last fact means that Enterprise's vital transportation assets remain very attractive. And so does its 7.6% distribution yield, which is still toward the high end of its historical range. The distribution, meanwhile, has been increased annually for 22 consecutive years, including in 2020 when the broader energy industry was facing massive headwinds. To be fair, Enterprise has never really offered rapid distribution growth, with low-to-mid-single-digit increases being the norm, but when you pair that with the hefty yield today, income focused investors would do well to take a closer look.
2. Getting back on track
Royal Dutch Shell has two major stories to tell. The first is that the European integrated energy major is pivoting with the world around it toward cleaner energy. The process will take a long time to complete, but as noted above, there appears to be plenty of runway for a business overhaul. Thus, investors looking to take advantage of the clean transition without giving up the cash that the oil business generates will find Shell appealing.
However, the second story is that at about the same time as the oil giant announced its new direction, it cut its dividend by a huge 66% or so. That will probably put off investors that value dividend consistency, even though it remains a well-run company.
RDS.B Dividend Yield data by YCharts
In fact, after the cut, Shell's yield sits toward the low end of its peer group. So far this doesn't sound like such a great investment idea. However, the dividend cut was really about management hitting the reset button. The goal was to create a new baseline from which Shell could start to steadily grow the dividend again as it also worked to adjust its business model for the future. It has already started down that path, including with three dividend increases since the cut. The most recent quarter featured a huge 38% increase over the previous payment.
It wouldn't be reasonable to expect hikes like that on a regular basis. But it shows that Shell is living up to its commitment to return value to shareholders via dividend growth. So if you are a dividend growth investor looking for an energy major that's willing to change with the times, Shell could be the right energy pick for you. Yes, the 3.2% dividend yield is on the low side of the industry today, but steady dividend growth is likely to be very rewarding from here.
Yield or growth?
Enterprise and Shell sit at two extremes of the dividend universe, one being a high-yield name and the other a dividend growth option. Clearly you'll prefer one or the other, and not likely both. But given the still vital importance of carbon fuels, it is likely that at least one of these two energy sector giants will be of interest.
