The energy industry is huge and supports the world's economic growth. No matter how much ESG investors want to see carbon fuels go away, they are here to stay for a lot longer. But there are many different ways to invest in the energy sector, with two big and important players being ExxonMobil (XOM 0.23%) and Enbridge (ENB 1.68%).
You can learn a lot about the industry -- and yourself -- by pitting these two energy giants against each other.
The core of the story
With a roughly $440 billion market cap, ExxonMobil is one of the world's largest energy companies. Not only does it have operations around the globe, but also across the entire oil and natural gas value chain. That includes producing oil and gas (upstream), transporting it (midstream), and turning these fuels into other products like chemicals and fuels (downstream). All of this diversification helps to provide some balance to the business, as some areas will be performing better while others are doing worse. That's important because energy prices are highly cyclical and are the driving force of the company's top and bottom lines. So diversification is a net benefit, but not enough to stop the huge swings in energy prices from leading to significant swings in profitability.
Image source: Getty Images.
Enbridge is a very different company, with operations largely focused on the midstream sector. It owns the energy infrastructure, like pipelines, that helps to move oil and natural gas around the world. This is largely a fee-based operation, so demand is more important than energy prices. And even when oil prices are low, demand usually remains fairly robust. Enbridge also owns a natural gas utility business and is investing in clean energy, but those are both largely regulated or contract-based operations and also offer reliable cash flows. All told, slow and steady is the name of the game here.
Built to reward
What's interesting about this pair, however, is that they are both focused on rewarding investors with reliable dividends. ExxonMobil achieves this by focusing on a strong balance sheet, with a current debt-to-equity ratio of around 0.2. That's a great number for any company and it allows management to take on debt during energy industry downturns so it can continue to both invest in its business and support its dividend. When the industry eventually picks back up again, ExxonMobil pays down that debt. The oil giant's dividend has increased every year for 41 consecutive years.
Enbridge approaches the energy sector with a business that is fairly consistent no matter what is going on with energy prices. That's what underpins its 28-year streak of annual dividend increases. And that reliable recurring revenue allows the company to take on more leverage on an ongoing basis, with a debt-to-equity ratio of nearly 1.4.
The big difference
So investors considering ExxonMobil and Enbridge will have to make a choice. If you are trying to play energy prices (which are somewhat elevated right now), ExxonMobil will provide that exposure and Enbridge really won't (or at least, not to the same degree). That said, ExxonMobil is not as tied to energy prices as some of the more heavily leveraged energy producers. But that's not a bad thing if you are also a dividend investor. Essentially, ExxonMobil is a relatively conservative way to invest in volatile oil and natural gas. That's a win for diversification-minded dividend seekers.
Enbridge, on the other hand, is a way to provide a consistent and relatively high-yield income stream to your portfolio via its dividend. It probably won't ever be exciting, but that's the point. It is a way to maximize the current income you are generating with an energy stock that won't keep you up at night.
And the winner is...
Which one wins the energy race depends on the type of investor you are. ExxonMobil's dividend yield is roughly 3.3% today. That's not a screaming buy, given that industry downturns are common and they can push the yield to double that rate (or more). If you are looking for an energy stock right now, it's probably a good choice. But given the nature of the energy sector, you'll likely find the next downturn presents a better buying opportunity.
Enbridge, meanwhile, offers a generous 6.5% dividend yield. And that dividend is well-backed by a business that generates consistent cash flow. However, the yield is likely to account for the lion's share of your return, so it is most appropriate for dividend investors looking to maximize income today.
