The price of oil has bounced back strongly from the depths of the pandemic, leading to strong rebounds in stocks in the broader energy sector. However, there are still a lot of names that are offering big yields backed by reliable businesses -- you just have to know where to look. Here are three energy names that dividend investors should really like.
1. Big, diversified, and boring
The energy sector has a number of different sub-groupings. One of the least exciting is the midstream niche, where businesses basically get paid to help move oil, natural gas, and the products into which they get turned around the world. The most conservative midstream players charge fees for the use of their assets, so the prices of the commodities running through their systems aren't as material as the demand for those commodities. As long as you believe demand for oil and natural gas will remain strong, the midstream is a great place to look for income. And the bellwether name in North America is Enterprise Products Partners (EPD 0.21%).
Image source: Getty Images.
With a $53 billion market cap, this master limited partnership (MLP) is among the largest in the midstream sector. Its collections of pipelines, storage, processing, and transportation assets would be virtually impossible to recreate. Enterprise's debt-to-EBITDA ratio, at roughly 3, is lower than its closest peers and provides ample flexibility should it encounter some adversity. It has increased its distribution annually for more than two decades, and its distributable cash flow covered the distribution by a hefty 1.7 times in 2021. The best part? Enterprise's yield is an eye-opening 7.5%. This industry giant is slow and boring most of the time, but it is also very reliable, making it the kind of name even the most conservative investor could love.
2. A bit more aggressive
Magellan Midstream Partners (MMP), with a market cap of $10 billion, is a bit smaller than Enterprise. However, it is every bit as strong financially, with a debt-to-EBITDA ratio just under 3. In fact, it's pretty normal for these two MLPs to sit at the low end of the sector, leverage-wise. That's extra important here, though, because Magellan's distribution coverage is much lower at around 1.2 times. That leaves less room for headwinds, but it has historically been considered strong in the midstream space. In other words, it's something to watch but perhaps not something to get overly concerned about.
Unlike highly diversified Enterprise, Magellan is far more focused on oil (about 30% of the business) and refined products (around 70%), like gasoline. This is basically a midstream bet that the combustion engine isn't going to go away overnight. The units yield a hefty 8.6% and the distribution has been increased annually for two decades. That's a distribution increase in each and every year since Magellan's 2001 initial public offering (IPO). If you want to place a more focused bet on trains, planes, and automobiles, Magellan and its fat yield could be for you.
EPD Dividend Yield data by YCharts.
3. Shifting toward cleaner alternatives
For some investors, focusing so much on carbon-based energy might be a bit concerning given the broader push toward cleaner alternatives. That's where Canada's Enbridge (ENB 1.09%) can offer a high-yield solution. The company has increased its dividend annually for 26 consecutive years and the yield is a generous 6.2%. With a market cap of $88 billion, it's even bigger than Enterprise. But what really sets it apart is the makeup of its portfolio.
Roughly 58% of its EBITDA comes from oil pipelines, 26% from natural gas pipelines, 12% from a natural gas utility business, and -- this is the one to watch -- 4% from renewable power. That breakdown probably won't get ESG-inclined investors excited, but it shows very clearly that Enbridge is using its carbon energy business to build out a clean energy operation. It has a number of internal projects lined up, but the big capital investments today are three offshore wind farms in Europe that are expected to come on line over the next few years. The goal is for the cleaner businesses to grow as the oil business's size gets relatively smaller. Although 4% of EBITDA seems pretty small, it's worth highlighting that roughly a third of Enbridge's planned capital spending is going toward renewable power, with none earmarked for oil assets. While the clean energy business is modestly sized today, management is very serious about building it out.
Something for everyone
Enterprise is a great diversified option for conservative investors looking for a high-yield energy investment. Magellan provides a higher yield, but you have to be willing to bet on the future of the combustion engine. And Enbridge's biggest draw is its growing investment in the clean energy space as it looks to adjust with the world around it. That makes it something of a punt in the energy sector. At the end of the day, there's likely one or more name here that will fit your energy stock needs.
