Investors who are coming up on retirement are shifting from building nest eggs to living off of them. It's a huge transition that may involve increasing the number of dividend-paying stocks you own.
But don't forget about the importance of having a diversified portfolio, which means that even energy stocks might be considered in the mix. Here are three dividend-paying energy companies that might make sense for your portfolio now.
1. Big, boring, and reliable
Chevron (CVX 0.44%) is one of the world's largest integrated energy companies, meaning its assets span from drilling, through the midstream sector, and down to the refining and chemicals arena. Each of these businesses has different operating characteristics that add up to a stronger, more balanced whole. For example, chemical and refining can actually benefit from the low oil prices that would hamper the energy production side of Chevron. Midstream is usually a strong performer in all environments. This is a safety-first kind of investment.
That's highlighted by the fact that Chevron has increased its dividend annually for over three decades despite the inherent cyclicality of the energy sector. The yield is currently about 3.1%. To be fair, that was much higher not long ago, when oil prices were in the dumps following a decline in demand during the early days of the coronavirus pandemic. However, relative to the broader market, 3.1% is still pretty good and, when you combine it with the long history of increases, Chevron starts to look like a good option in the energy sector for investors in search of dividend consistency.
Notably, the company's balance sheet, with a debt-to-equity ratio of 0.15, is among the strongest of its direct peer group. Oil prices are a big determinant of the company's success and investors' perception of its shares, but it has proven its dividend reliability many times over at this point.
2. Sidestepping the biggest risk
If you don't want to deal with oil's ups and downs, then a good place to start is Enterprise Products Partners (EPD 0.48%). It is one of the largest midstream players in North America with a massive collection of pipelines, storage, processing, and transportation assets. The key is that this infrastructure is both necessary to the movement of energy around the world and driven by fees, so demand is the big issue to watch, not commodity prices.
This master limited partnership (MLP) has increased its distribution for 24 consecutive years.
Even more enticing for conservative dividend investors will be its financial strength. The MLP's balance sheet is investment-grade rated, its financial debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) is among the lowest of its peer group, and its distributable cash flow was nearly double its distribution in the third quarter. The distribution yield, meanwhile, is a hefty 7.6%. There's a lot to like here if maximizing income is your goal.
3. Mixing things up
Another name to keep in mind is ConocoPhillips (COP -0.43%). It is one of the largest pure-play energy producers in North America, and its financial results are almost completely dependent on the prices of the commodities it produces.
To add to the uncertainty here, the company has a variable dividend policy that includes a reasonable base dividend and the potential for an additional quarterly distribution if the company's performance is strong. That means if oil prices are high, you can expect big dividends.
This is a terrible option for investors seeking dividend consistency. However, if your goal of including an energy stock in your portfolio is to increase its diversification, then there's a reason to keep ConocoPhillips in the option mix.
The story is pretty simple: When inflation is raging, like it is today, commodity prices are often high. That will probably mean strong results for a commodity-driven name like ConocoPhillips, which will reward investors with extra dividends right when their living costs are being pushed higher. That's a potential win, if you can handle the downside of the equation -- dividend cuts when oil prices are falling.
This is a nuanced investment, but for the right investor it could be a way to hedge inflation risks.
Different ways to play
There's no "right" solution that will fit every investor's needs. But among Chevron, Enterprise, and ConocoPhillips, there's likely to be something that will fit well in with your needs. That ranges from a high yield that doesn't track with oil prices to one that changes directly because of oil prices. If you take the time to dig in here, one of these energy stocks could easily end up rounding out your diversified, dividend-focused retirement portfolio.
