If you have $1,000 to invest right now, you should definitely be looking at dividend stocks. But don't buy a stock just because it has a high yield. You want to own good businesses that have attractive dividend characteristics.
Three places to start your search are NextEra Energy (NEE -7.00%), Enterprise Products Partners (EPD -1.01%), and Chevron (CVX 0.18%). Here's what you need to know about each one.
1. NextEra Energy is more than just a boring utility
NextEra Energy's dividend yield is around 3% today. That's more than twice the level of the S&P 500 index and a touch better than the average utility's 2.9% yield. The dividend has been increased annually for three decades.
But the really interesting fact here is that it has grown at an annualized rate of 10% over the past decade, and management believes it can keep that pace up for the foreseeable future. A mid-single-digit dividend growth rate is considered strong for a utility; 10% is phenomenal.
Image source: Getty Images.
The way NextEra Energy has achieved this is important. First, the foundation of the business is a boring regulated utility that operates in Florida. It has long benefited from migration to the state, but it is still a relatively slow and steady business.
Layered on top of this is a second business that builds and runs clean energy assets. There is a long runway for growth as the world increasingly makes use of cleaner energy sources over dirtier ones usually based on carbon fuels. If you are a dividend growth investor, putting $1,000 into NextEra Energy would likely be a good call.
2. Enterprise Products Partners has a big yield
Midstream master limited partnership (MLP) Enterprise Products Partners has a lofty 6.6% distribution yield, and the payout has been increased annually for more than a quarter of a century. Although it operates in the highly volatile energy sector, it is actually a very reliable (and boring) business.
Midstream companies like Enterprise help to move oil and natural gas from where they are extracted to where they are used. They own things like pipelines and storage assets for which customers pay a fee. The price of the commodities in the system is less important than energy demand, which tends to remain high throughout the energy cycle.
That is the business foundation, but Enterprise puts that atop a rock solid investment-grade balance sheet. And its distributable cash flow covered its distribution by 1.7 times in 2024, so there's a lot of room for adversity before the distribution would be at risk. If you are a high-yield investor, this would be a good spot for $1,000 today.
3. Chevron is a strong play in the oil patch
If you want to invest in oil and natural gas stocks, however, a more direct option than Enterprise would be Chevron, with a dividend yield currently at 4.9% versus the energy industry average of 3.6%. Chevron has increased its dividend every year for 38 consecutive years. That's actually pretty impressive given that its top and bottom lines are largely tied to oil and gas prices.
The company has achieved this consistency thanks to its diversified business model and a conservative approach to leverage. It's known as an integrated business. That means that Chevron has exposure to the entire energy value chain, from production to transportation to chemicals and refining. This helps to smooth out the inherent ups and downs in the industry since each segment operates a little differently.
On the leverage side of things, Chevron tends to focus on having low leverage so that it can add debt during industry downturns, which allows it to continue investing in its business and to keep paying dividends. When energy markets recover, as they always have historically, it reduces debt to prepare for the next downturn.
Enterprise and NextEra Energy are probably better dividend stocks if you are looking for high yields or dividend growth, respectively. But if you want to put $1,000 into the oil patch while the sector is out of favor on Wall Street (as it is today), Chevron is one of the best all-around options.
Don't focus on yield, focus on quality
Dividend yield is an important part of the story behind NextEra, Enterprise, and Chevron. But it is only one part. Buying just for yield creates a risk that you end up buying something you don't really want to own for the long term. It's a bad approach if you have $1, let alone $1,000 to invest.
Far better is to buy high yields backed by strong businesses. And that's exactly what you get with NextEra, for dividend growth investors; Enterprise, for yield seekers; and Chevron, for those looking specifically for oil exposure.
