If there's one thing you can count on in the energy sector, it is that oil and natural gas prices will be volatile. However, when energy prices head higher investors routinely seem to forget this fact, even though history says what goes up will eventually go down. Dividend investors can avoid that trap by buying midstream giants like Enterprise Products Partners (EPD +2.46%) and Enbridge (ENB +1.87%) while avoiding the variable dividends that ConocoPhillips (COP +1.34%) pays. Here's why you may want to consider Enterprise and Enbridge while avoiding ConocoPhillips.
Happily playing the middle
Enterprise Products Partners is a huge midstream master limited partnership (MLP) operating in North America, boasting a roughly $50 billion market cap. Canada's Enbridge is an even bigger midstream company, weighing in at roughly $75 billion. These midstream players own massive collections of physical assets, like pipelines, storage, processing, and transportation facilities. This vital infrastructure helps to move oil and natural gas from where it is drilled to where it eventually gets processed and used. The portfolios owned by Enterprise and Enbridge would be virtually impossible to replace.
NYSE: EPD
Key Data Points
The important part here, however, is that the vast majority of the cash flow these two pipeline owners collect is from fees. That means that demand for oil and natural gas, and thus the use of their midstream infrastructure assets, has a bigger impact on cash flow than the price of what is flowing through their systems. Oil prices falling, like they have been of late, really won't have too huge an impact on the distributions that either of these two industry giants pays.
That is one reason why Enterprise Products Partners has been able to increase its distribution for 24 consecutive years. And why Enbridge's record is up to 27 years. Both are fairly conservative operations that have proven that investors can rely on their disbursements in good energy markets and bad.
There are differences between them worth noting, starting with Enterprise being an MLP and Enbridge being a Canadian corporation. MLPs come with tax complications, like the need to deal with a K-1 form. Enbridge's dividends, meanwhile, are subject to Canadian taxes, which you can generally claim back come April 15, and the amount U.S. investors receive will vary with exchange rates. Enbridge also has some exposure to clean energy investments (around 4% of earnings before interest, taxes, depreciation, and amortization), like wind farms, with plans to expand that business. But the core of the story is the reliable fees both collect, which can provide energy investors a safe haven during volatile energy markets.
NYSE: ENB
Key Data Points
Enterprise's yield is currently a huge 8%. Enbridge pays a nearly as-impressive 6.8%.
Big dividends that could fail investors
Over the past year ConocoPhillips has paid $4.44 in dividends, equating to a trailing dividend yield of nearly 4.4%, given the recent stock price of roughly $101 per share. That's a decent yield in the energy space, and well above the sub-2% yield that investors would get from the broader market. However, there's an important nuance that separates ConocoPhillips from some of the biggest oil giants: Its dividend is variable.
The company pays a base dividend that is expected to be supportable over time. That's currently $0.46 per share per quarter. Based on that dividend alone, the yield is closer to 1.9%. However, because oil prices have been on the rise over the past year (a trend that has only recently started to stall), ConocoPhillips has paid out increasingly large variable quarterly payments. The numbers here are impressive, with the last four quarterly payments being $0.20 per share, $0.40, $0.70, and a huge $1.40. This is an interesting way to ensure that investors benefit when oil prices are rising. However, oil prices also fall, so that trailing yield shouldn't be counted on because those payments are unlikely to remain at these elevated levels forever.
NYSE: COP
Key Data Points
That's not to suggest that ConocoPhillips is a bad company, just that income investors have to think about it very differently than they would other energy companies that don't have variable dividend policies. For example, ExxonMobil's yield is around 4.1% right now, and the company has a long history of supporting that payment in good markets and bad.
Exxon and ConocoPhillips have different business models, given Exxon's integrated business and ConocoPhillips' focus on just "upstream" oil and gas production. But the differences here matter and the dividend is a key part of it. ConocoPhillips is using variable payments to reward investors when times are good without having to resort to a dividend cut when times are bad. Exxon focuses on being a reliable dividend payer through the cycle, which is in line with its more diversified business approach. All in, if you are a dividend investor looking for dividend consistency, ConocoPhillips is just not a very good option.
Know what you own
The key here is that Enterprise and Enbridge are high-yield names built to sidestep the inherent ups and downs of energy prices. ConocoPhillips dividends, on the other hand, are specifically designed to ride the wave up and down, so the income investors collect will be inherently unreliable. If you are trying to live off of the income your portfolio generates, the pipeline giants are a way better option.
