Oil prices fell dramatically during the early days of the pandemic in 2020, and have since rallied back strongly. It is shocking to see this kind of volatility, but it's actually kind of normal in the energy sector. And some companies manage to pay impressive, sustainable dividends just the same. Here's why Chevron (CVX 1.33%) and Enbridge (ENB 0.34%) are two of the safest dividend stocks in the energy space today.
Big and rock-solid
Chevron is one of the largest integrated energy companies you can buy, with a massive $300 billion market cap. Its business is spread across the energy landscape, from exploration & production through the midstream, and all the way to refining and chemicals. This diversification helps to balance out performance, smoothing the inherent ups and downs of the sector. Essentially, downstream businesses (chemicals and refining) tend to benefit from the low oil prices that hurt the company's upstream operations (drilling), and vice versa.
Chevron has built a large and relatively conservative business model on top of an industry-leading balance sheet. To put a number on that, the company's debt-to-equity ratio is a very modest 0.17 times, the lowest in its peer group. This gives the company ample room to protect its dividend when energy prices turn south by taking on debt, which is the basic plan it has used for years. And then it pays down the debt when the industry rebounds.
The success of this effort is pretty impressive: Chevron has increased its dividend annually for more than three decades. That makes it a Dividend Aristocrat in a sector that is known for dramatic swings in profitability. It's a pretty big statement about how the company thinks about returning value to shareholders. And with oil prices high and energy profits robust, now is the time to take a safety-first attitude if you live off of your dividend income. Indeed, the next big swing could easily be sharply falling energy prices and profits.
Shifting the logic
While companies like Chevron tend to see financial results swing between strong and weak as oil prices shift between cheap and expensive, Enbridge takes an entirely different route. This company operates in the midstream sector, with oil and natural gas pipelines that help move energy from where it is drilled to where it is consumed. It charges fees for the use of its assets, so demand for energy is more important than commodity prices. This is good for investors, because it results in fairly consistent cash flows.
This is one of the reasons why Enbridge has been able to increase its dividend annually for 27 consecutive years. But there's another reason to like this North American midstream giant. Enbridge is currently generating around $2 billion more cash than it needs to supports its business, capital investment plans, and dividend. There's a lot that can be done with that money, including paying down debt, buying back stock (the current favorite option), and investing in the business. However, conservative dividend investors might also see it as a cushion for the dividend should the company fall on hard times.
Reliable income streams
Chevron's dividend yield today is a generous 3.6%, with Enbridge coming in at 6.1%. Both are attractive relative to the S&P 500 Index, which is offering a yield closer to 1.5%. When you add in their long histories of annual dividend increases and the safety of their disbursements, this pair of stocks look even more enticing. If you are looking for safe energy dividends, Chevron and Enbridge should be on your short list.