Energy is a very difficult sector for dividend investors to invest in because of the dramatic swings in oil and natural gas prices. There are a few energy producers, like ExxonMobil and Chevron, that have managed to reward investors with reliable dividend growth through the cycle, but they are the exception and not the norm. For more conservative income investors a better energy option is the midstream niche of the energy sector, where giants Enterprise Products Partners (EPD 0.45%) and Enbridge (ENB -1.21%) have produced reliable dividends backed by reliable cash flows. Here's what you need to know.
Commodity volatility is tough
There's no way around the big-picture story in the energy sector. Oil and natural gas are commodities that are prone to swift and dramatic price swings. Earnings and stock prices in the sector can be just as volatile. This level of turbulence will likely turn off more conservative dividend investors. That's entirely reasonable.
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However, there are different types of energy stocks. Broadly speaking, the sector is broken down into three broad groupings, upstream (energy producers), midstream (pipeline owners), and downstream (chemicals and refining). The upstream and downstream segments are both very volatile thanks to commodity price variability. But the midstream is different -- most companies here charge fees for the use of their assets, which tends to produce reliable cash flows through the entire energy cycle. That's exactly the type of business that a conservative dividend investor could learn to love.
In fact, demand for oil, natural gas, and the products into which they get turned is more important than commodity prices for midstream giants like Enterprise Products Partners and Enbridge. Demand, meanwhile, tends to remain robust even when oil prices fall because energy is so important to modern society. For that same reason oil and natural gas demand is expected to remain strong over the longer term even as clean energy demand increases.
Enterprise is the pure play
Between Enterprise and Enbridge, investors looking to focus on the midstream sector will prefer Enterprise. The master limited partnership (MLP) is one of the largest owners of energy infrastructure in North America. It is heavily focused on natural gas, which is expected to be a transition fuel as the world shifts toward lower-carbon sources of energy. Notably, Enterprise is a big player in the export space, with its facilities handling 34% of waterborne natural gas liquid exports in 2023, 20% of crude exports, and 13% of waterborne petrochemical and refined products exports.
The fees produced for moving all of that oil and natural gas back an ultra-high 7.2% distribution yield. The distribution has been increased for 25 consecutive years and is backed by both an investment-grade-rated balance sheet and distributable cash flow that covered the distribution by a comfortable 1.7 times in 2023. If you are looking for a conservative high-yield midstream investment, Enterprise is a great option.
Enbridge is branching out
Enbridge has a strong dividend story to tell, too. Its dividend yield is a hefty 7.8%. The dividend has been increased for 29 consecutive years. The company's balance sheet is investment-grade. And the distributable-cash-flow payout ratio is right in the middle of management's target range at 65%. Plus, it owns a massive portfolio of North American energy infrastructure. But it is not a pure play like Enterprise.
In addition to oil and natural gas infrastructure, Enbridge also owns a natural gas utility and renewable power assets in the U.S. and Europe. These investments produce reliable cash flows, just like midstream assets, but they also make Enbridge a more diversified energy company. In fact, Enbridge has agreed to buy three large U.S. natural gas utilities in 2024, further increasing its diversification. The big goal is to provide reliable dividends to investors while, at the same time, adjusting its portfolio as the world moves away from dirtier carbon fuels (like coal and oil). If you like the clean energy hedge this offers, Enbridge will probably be more appealing to you than Enterprise.
A pair worth loading up on
Neither Enterprise nor Enbridge are likely to be exciting investments. The yield is probably going to make up the lion's share of your return. But that will be appealing to more conservative types looking to maximize the income their portfolios generate. The big reason to buy as soon as possible, meanwhile, is so that you can capture the ongoing dividend growth that this pair is set to offer for decades to come.
