Devon Energy (DVN +0.23%) is a perfectly fine upstream energy company, if that's what you're looking for. But if you're in the market for a high-yield energy stock that hails from the energy sector, you can do better. This 7.4%-yielding master limited partnership (MLP) is a great place to start.
Devon Energy's big high yield flaw
Devon Energy's oil production in the second quarter of 2024 reached an all-time high. The company increased its full-year production guidance for the second consecutive quarter. It upped its stock buyback plans. And it continues to expand its portfolio by acquisition. Now add in at least 10 years' worth of drilling opportunities in the portfolio, and there's a lot to like here if you're looking for an upstream energy producer.
NYSE: DVN
Key Data Points
But if you're looking for a high-yield stock, you could be in for a shock. Sure, the dividend yield is currently around 4.4%. That's well above the market's miserly 1.2% or so and more than a percentage point higher than the average energy stock's 3.1% yield, using Energy Select Sector SPDR ETF as a proxy. But Devon's dividend payment can vary greatly from quarter to quarter because the final value is tied to the energy company's financial performance. In other words, you really can't count on the income you generate here when energy prices fall, because Devon's financial performance will decline along with oil prices.
Enterprise Products Partners' growth streak hits 26 years
At the other end of the reliability spectrum is Enterprise Products Partners (EPD +0.63%), which has increased its distribution for 26 consecutive years. This investment grade-rated energy master limited partnership (MLP) covers its distribution by a huge 1.7 times with distributable cash flow. It's highly focused on consistency, which it has clearly achieved for high-yield investors. And it has a huge 7.4% distribution yield. If you're looking for a high-yield energy stock, Enterprise should be on the top of your list.
NYSE: EPD
Key Data Points
The key to the story, however, is that Enterprise isn't an energy producer, like Devon. It's a midstream player, which means it owns the energy infrastructure, like pipelines, that help to move oil and natural gas around the world. This is a game-changer for dividend investors.
While Devon's top and bottom lines are heavily influenced by energy prices, Enterprise charges fees for the use of its vital infrastructure assets. The price of the energy commodities flowing through its system isn't nearly as important as demand for energy. Demand for energy tends to remain fairly strong even when energy prices are low. Thus, Enterprise's cash flows are highly consistent over time, and it can afford to pay large distributions through the entire energy cycle.
EPD Dividend data by YCharts
Growth comes from rate increases, new assets, and acquisitions. That said, the opportunity for growth is fairly modest, so investors need to understand that the yield will make up the lion's share of return here. But if high-yield income stocks are what you're after, that probably won't be a problem for you.
Enterprise is the reliable choice
There are good reasons for dividend investors to own a stock like Devon Energy, one of them being that the dividend will probably be rising right when your real-world energy costs -- for gasoline and heating, for example -- will be rising. Thus, it can provide a hedge for your day-to-day living expenses. But if you're trying to build a large and reliable income stream, you'll be better off with a high-yield investment like Enterprise Products Partners. Its entire business is designed around consistency, and that flows right through to the steadily growing distribution.
