Oil prices have bounced around quite a bit this year. West Texas Intermediate, the U.S. oil benchmark price, which was recently in the high $60s, has been as high as $80 and as low as $60. That volatility will affect the cash flows of oil producers, which might affect some of their ability to continue paying consistent dividends.
However, some industry high-yield stocks remain steady despite the sector's volatility. Enterprise Products Partners (EPD -0.61%), Chevron (CVX -0.21%), and Enbridge (ENB -1.13%) stand out to a few Fool.com contributing analysts for their resilience. Here's why you can count on these three income plays no matter the volatility.
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Enterprise offers more than just a high yield
Reuben Gregg Brewer (Enterprise Products Partners): The big reason most investors will find Enterprise Products Partners attractive is its 6.9% distribution yield. But there's so much more to love here than just a big distribution. For example, the distribution has been increased annually for 26 consecutive years even though it operates in the highly volatile energy sector.
But that's an external sign of strength. The real reason to love this high yielder is its business model. Enterprise owns the energy infrastructure, like pipelines, that help to move oil and natural gas around the world. It largely charges fees for the use of its assets, which means that demand for its services is more important than the price of the commodities flowing through its system. Energy is vital for modern life, and demand tends to be robust in good energy markets and bad ones.
That's not the whole story, either, however. Enterprise also happens to have an investment grade-rated balance sheet. And its distributable cash flow covers its distribution by a hefty 1.7 times. There's a huge amount of leeway for adversity here before a distribution cut would be on the table. And given the $7.6 billion in capital spending plans currently in the works, it seems far more likely that continued distribution growth lies ahead.
Enterprise's distribution, though, will probably make up a huge portion of the total return over time. But if you're looking for reliable dividend stocks in the energy sector at a time when energy prices are volatile, it's hard to beat this high-yield master limited partnership.
Primed for growth
Neha Chamaria (Chevron): Although the earnings and cash flow of every oil producer are tied to oil prices, there are some companies that have such a massive portfolio, such robust financials, and such disciplined capital allocation policies that they're able to generate strong shareholder returns even during turbulent times. Dividends play a big role, and stocks that can pay you regardless of where oil prices sit are also often the biggest winners in the long term. Chevron, yielding 4.8%, is one such oil stock that can pay you bigger dividends year after year, even in today's volatile oil environment.
2024 was a big year for Chevron. It returned a record $27 billion to its shareholders, including $11.8 billion in dividends. The oil major also increased its dividend by 5% this year, marking its 38th consecutive year of annual dividend increases. That dividend streak alone is testimony to Chevron's dividend stability.
Chevron has big things coming up that should drive its dividends even higher. It just won a legal battle with rival ExxonMobil and has acquired Hess and, with it, a 30% stake in the prized Stabroek Block in Guyana aside from assets in the U.S. Bakken. Chevron expects the acquisition to boost its production and free cash flow "significantly" in the coming years, which should support even higher returns to shareholders. In other words, investors in Chevron can expect not only regular dividends but also much bigger dividends from the oil giant despite oil price volatility.
Proven predictability in a volatile market
Matt DiLallo (Enbridge): Enbridge operates North America's largest and most complex oil and liquids pipeline system, transporting 30% of the continent's oil. Its liquids pipeline assets generate about half of its yearly earnings. Despite significant oil market exposure, oil prices have minimal effect on Enbridge's financial results.
That's due to its limited direct exposure to commodity prices. About 98% of Enbridge's earnings come from assets backed by cost-of-service agreements or long-term contracts. The company also has a very diversified business mix. In addition to liquids pipelines, Enbridge operates natural gas pipelines, gas utilities, and renewable energy assets. As a result, its low-risk business model produces stable and predictable cash flow. The company's business is so predictable that it has achieved its annual financial guidance for 19 years in a row.
Enbridge's stable cash flow enables it to pay a resilient dividend, with more than 70 years of payments and increases for 30 consecutive years. More dividend growth seems likely. Supporting this view is its massive backlog of commercially secured growth capital projects, such as new pipelines and utility expansions, that will contribute additional cash flow as they come online through the end of the decade. Because long-term contracts underpin these projects, they provide clear, predictable revenue streams that should help Enbridge fund future dividend increases. The company's low payout ratio and conservative balance sheet further support its ability to deliver sustainable dividend growth, even in the event of continued oil price volatility.
