Geopolitics is a risk for the markets that never seems to go away. It is a particularly acute issue for the energy sector, with a lot of oil coming out of the often geopolitically tense Middle East. This dynamic is clearly in the headlines today. But you can invest in the energy sector in a way that minimizes such risks. Here are two high-yield ways to do just that while you collect yields of up to 6.9%.
The energy sector has three parts; only two are highly volatile
The energy sector is largely broken down into three parts: the upstream, the midstream, and the downstream. The upstream is where oil and natural gas are produced. This segment is highly impacted by energy price swings. The downstream is where oil and natural gas get processed into chemicals and refined products, like gasoline. Oil and natural gas are key inputs, so commodity price swings have a huge impact on this segment. That said, many chemicals and refined products are also commodities, so there's often a double impact from commodity volatility in the downstream.
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The midstream is the big exception in the energy sector. Midstream companies own energy infrastructure like pipelines, storage, and transportation assets. These assets basically connect the upstream to the downstream and the rest of the world. Since most of the activity in this segment is really tied to moving energy commodities around, midstream companies tend to charge fees for the use of their assets. Demand for energy is more important than the price of energy in this business model. Demand for energy tends to be robust regardless of commodity prices because of how important energy is to modern life.
All in, midstream companies generally have fairly reliable cash flows. That allows midstream companies to pay out generous dividends and support those dividends through the swings that frequently take place in the price of oil and natural gas. Investors looking for energy exposure without all of the geopolitical price risk should look at midstream players like Enterprise Products Partners (EPD +0.62%) and Enbridge (ENB 0.08%). But not all midstream companies are equally reliable, as the dividend histories behind Kinder Morgan (KMI +0.35%) and Energy Transfer (ET +0.85%) highlight. Each one of these high-yield stocks trades for well less than $100 a share.
Reliability is key for Enterprise and Enbridge
There are two stats that make Enterprise and Enbridge attractive income investments. The first is yield, with Enterprise offering a distribution yield of roughly 6.9% and Enbridge a dividend yield of about 6.1%. That said, these aren't the only high-yield midstream businesses you can buy. For example, Energy Transfer has an even higher yield of 7.2%. Before you jump on that lofty yield, you should take a look at 2020, which was a difficult one for oil prices thanks to the economic shutdowns used to slow the spread of the coronavirus pandemic. That was the year that Energy Transfer cut its distribution.
NYSE: EPD
Key Data Points
Energy Transfer isn't the only midstream dividend stock to worry about. Kinder Morgan, which offers a lower 4% yield, fell short of its plans to raise its dividend by 25% in 2020, offering just a 5% hike instead. That seems reasonable, given the economic backdrop, but it comes after a dividend cut in 2016, the last time oil prices were in the dumps. And in 2016, Kinder Morgan cut after telling investors to expect an increase of up to 10%.
NYSE: ENB
Key Data Points
To be fair, both Kinder Morgan and Energy Transfer used their dividend cuts to improve their financial conditions. But both Enterprise and Enbridge increased their disbursements in 2016 and 2020. And both have long been conservatively run, including having investment-grade-rated balance sheets. A strong financial foundation and a conservative operating ethos have allowed Enterprise to increase its distribution annually for 26 consecutive years and Enbridge to raise its dividend each year for 30 years. That reliability is the second reason that these two high-yielders stand out from the pack. And if you are going to put your hard-earned cash to work, even if it's just $100, you should probably stick with companies you can trust.
Enterprise and Enbridge are reliable high-yield energy stocks
There are clearly nuances to the businesses behind Kinder Morgan, Energy Transfer, Enterprise, and Enbridge. Some investors may even prefer Kinder Morgan and Energy Transfer based on their specific businesses. But if you are looking for income stocks you can trust in the volatile energy sector, North American midstream giants Enterprise and Enbridge stand out on the reliability front. Add in their lofty yields, and the choice should be pretty easy whether you are investing $100 or $100,000.
