The energy sector is notoriously volatile, with oil and natural gas often experiencing swift and dramatic price changes. However, energy is incredibly important to the world economy and should probably be in every investor's portfolio. If you have $500 to put toward the sector, you should probably either go big, with a stock like Chevron (CVX 0.37%), or go niche, with an investment like Enterprise Products Partners (EPD 0.45%). Here's a look at both of these options.
Chevron gets you everything you need
Chevron is an industry giant, competing head-to-head with companies like ExxonMobil (XOM -2.78%). It is what is known as an integrated major, which means it has operations across the entire energy sector. That includes oil and natural gas production (upstream), the transportation of these fuels (midstream), and the processing and refining of these energy sources into chemicals and other products, like gasoline (downstream). Chevron also has operations around the world, so it provides geographic diversification as well. It is kind of a one-stop shop for energy exposure.
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The benefit of being diversified across the sector is that the upstream, midstream, and downstream segments tend to do well at different times. For example, low oil prices can actually benefit refining operations because it means input costs are low. This dynamic helps to soften the peaks and valleys the industry experiences, leading to more steady performance over time. Furthermore, Chevron has one of the strongest balance sheets among its peer group. It has easily endured recent industry downturns and should continue to do so in the future.
The best part of Chevron's story is probably its dividend. The yield is a fairly attractive 4% or so. But the dividend has been increased annually for 36 consecutive years, right through multiple industry slumps. That shows the consistency the company can provide even in the worst of times. The best time to buy Chevron is probably during the industry's downturns, when investors are usually the most pessimistic on the shares, but it is really among the best options anytime you are looking at the sector.
Enterprise is happily in the middle
Unlike Chevron, Enterprise Products Partners is highly focused. It operates in the midstream segment of the energy industry. Midstream is kind of an outlier in the sector because it tends to produce highly reliable cash flows regardless of what is going on with energy prices. This is how Enterprise has managed to increase its distribution annually for a quarter of a century. Plus, it offers a huge 7.3% distribution yield.
The key to the story here is that Enterprise owns the assets that are used to move oil and natural gas around the world. That includes things like pipelines, storage, and transportation facilities. These are large, expensive, and vital assets. Enterprise charges fees for the use of these assets, which creates consistent cash flows. And given their necessity nature, it can regularly increase the fees over time. Add in an investment grade-rated balance sheet, and you can see how Enterprise has created such a great distribution history.
The caveat is that the huge yield is going to make up most of an investor's return. There aren't a lot of large capital investment opportunities in the mature midstream sector, so Enterprise pushes most of the cash it generates on to unitholders. Slow and steady growth is the best you can realistically hope for. However, if you are looking to maximize the income your portfolio generates, that probably won't matter to you.
Two good, but different ways to play energy
When you look at the energy sector, you need to consider ways to minimize risk. If you are looking for commodity exposure, Chevron gives that to you but with the backing of a company that knows how to deal with the industry's ups and downs. Enterprise lets you sidestep the commodity risk (and collect a fat yield) by focusing on producing steady fees. One of these two will probably be a no-brainer starting point for you if you are looking at energy stocks today. The best part? Both have share prices below $500 right now.
