Oil prices are notoriously volatile. In the past three years, the primary U.S. oil price benchmark, West Texas Intermediate, has ranged from a low of around $35 a barrel to a peak of more than $120. That volatility greatly affects the cash flows of companies focused on producing oil, which can affect their ability to pay dividends.
However, some energy stocks are relatively immune to the impacts of oil price volatility. Enbridge (ENB -1.21%), Energy Transfer (ET 0.12%), and Enterprise Products Partners (EPD 0.45%) stand out to a few Fool.com contributors as ideal oil dividend stocks because of their ability to withstand the ebbs and flows of oil prices. Here's a look at why they believe these energy companies are no-brainers for those seeking steady income from the oil patch.
Enbridge's high yield isn't dependant on high oil prices
Reuben Gregg Brewer (Enbridge): With a dividend yield of 8.1% backed by a dividend that has been increased annually for 28 consecutive years, there's a lot for dividend investors to like about Enbridge. This $68 billion market cap Canadian-based midstream giant clearly has some impressive dividend bona fides, but the really notable issue is that volatile energy prices aren't the driving force behind the business.
Roughly 57% of this company's earnings before interest, taxes, depreciation, and amortization (EBITDA) is tied to oil pipelines. Another 28% comes from natural gas pipelines. So 85% of EBITDA comes from an industry known for commodity price volatility. But Enbridge is just a toll taker, charging fees for the use of its midstream infrastructure. As long as people are still using oil and natural gas, its business should hold up just fine.
ENB Dividend Per Share (Annual) data by YCharts
That means this investment grade-rated company should have little trouble navigating the oil market's ups and downs while continuing to pay investors well all along the way. (Note that Enbridge's dividend is paid in Canadian dollars. The actual dollar value U.S. investors receive will vary along with exchange rates.) So if you're looking for a high yield in the energy sector investment but are worried about the risk of an oil price decline, Enbridge is a good way to get your energy exposure while largely sidestepping the commodity risk you justifiably fear.
Focusing on collecting fees
Matt DiLallo (Energy Transfer): Midstream giant Energy Transfer generates very predictable earnings. The company operates what amounts to a toll road for oil and gas. It collects fees as volumes follow through its pipelines and other midstream assets that aren't dependent on oil prices. This year, roughly 90% of the earnings for this master limited partnership (MLP) will come from fees-related sources like long-term fixed-rate contracts or government-regulated rate structures. That insulates it from the market's volatility.
Energy Transfer distributes about half its steady cash flow to investors in a payout that currently yields 9.2%. It retains the rest to fund expansion projects and maintain a solid balance sheet.
It plans to invest $2 billion to $3 billion on organic expansion projects annually, including $2 billion in 2023. These projects will grow its sources of steady earnings. The company also uses its solid and improving balance sheet to make acquisitions. It acquired Lotus Midstream for nearly $1.5 billion earlier this year and is working to close its $7.1 billion merger with fellow MLP Crestwood Equity Partners. These deals will grow its stable earnings and increase its free cash flow. Those two growth drivers support Energy Transfer's plans to increase its distribution by 3% to 5% annually.
The MLP's more resilient business model makes it an ideal option for investors seeking income protected from the oil sector's volatility.
A proven dividend-paying business model
Neha Chamaria (Enterprise Products Partners): Enterprise Products Partners started paying a dividend in 1998. Since then, the midstream energy giant has not only paid a dividend consistently but also increased it every year, with 2023 marking its 25th consecutive year of dividend increases. Enterprise Products has weathered oil market turmoil well over the years, and there's little reason to believe it won't continue to do so.
Enterprise Products has a massive pipeline network spanning nearly 50,000 miles which transports crude oil, natural gas, natural gas liquids, petrochemicals, and refined products. It also has liquids storage and natural gas processing facilities. Since the company earns fees for its services mainly under long-term contracts, it can generate pretty stable cash flows.
What's more important, though, is how well management puts all that cash to use. Enterprise Products has done a commendable job so far, having consistently returned value to shareholders in the form of dividends and share buybacks while investing for growth and ensuring a strong balance sheet. In the past 25 years, the company has returned nearly $50 billion to shareholders.
Enterprise Products is on solid footing right now, with its distributable cash flow (DCF) covering dividends by 1.8 times in the twelve months through its second quarter. A high coverage indicates greater dividend stability, and that's just one of the things that makes this 7.3%-yielding stock a no-brainer bet for investors in oil.
