Energy is one of the most important things in the world. Spend one day without power of any kind and you quickly realize that you might as well be living in the Stone Age. Most investors should have some exposure to energy, including the highly volatile oil and natural gas sector. But what's the best way to include it in your portfolio?

Chevron (CVX 0.17%) and Enterprise Products Partners (EPD 0.76%) are top-notch choices. They both offer attractive yields, but they are vastly different businesses. Here's how you can pick the one that's right for your income portfolio.

 

Great dividend streaks either way you go

Before going into the different business models here, it is important to examine how reliable each of these income stocks really is. Chevron is a much older company and has a 38-year streak of annual dividend increases behind it. Enterprise's streak is 27 years long, which is basically as long as it has existed. Pretty clearly, they stand toe to toe when it comes to income reliability.

That said, there's a vast difference when it comes to dividend yield. Chevron's yield is 4.3%. Enterprise's distribution yield is 6.9%. This isn't an apples-to-apples comparison, however. Chevron is a traditional corporation, while Enterprise is a master limited partnership (MLP). The MLP structure is a bit complex and it is specifically designed to pass income on to unitholders in a tax-advantaged fashion. The trade off is more work come tax time, thanks to the K-1 form unitholders have to deal with.

If you want to keep your tax life simple, you'll want to avoid MLPs like Enterprise. But if you want to maximize the income your portfolio generates, you'll definitely want to consider MLPs. But the bigger difference between Enterprise and Chevron for most investors is going to show up in how they operate.

What do Chevron and Enterprise do?

Enterprise Products Partners is what is known as a midstream MLP. It owns energy infrastructure assets that move oil and natural gas around the world, including storage, pipelines, and transportation assets. These are expensive to build (or buy), but they generate reliable fee income. And the fees are paid for the use of the assets, so the price of the oil and natural gas that they move is far less important to Enterprise's financial results than commodity prices.

Chevron, by contrast, is an integrated energy company. That means that it owns assets across the energy landscape, from production (the upstream), through the midstream, and all the way to refining and chemicals (the downstream). The midstream exposure provides some stability, but the upstream and the downstream are both commodity driven.

That's a negative and a positive. The upstream is hurt when oil prices are weak, but the downstream uses oil as an input and can actually benefit from low energy prices. The end result is that the integrated model helps to soften, but not eliminate, the revenue and earnings swings that occur because of volatile energy prices. It is a relatively stable way to invest in oil and natural gas, but it still exposes investors to commodity volatility.

Which one is right for your portfolio?

If you are a risk-averse investor looking to generate as much income as possible from your portfolio, the answer here will be Enterprise Products Partners. It has a higher yield and a more consistent business model.

But some investors actually want more direct exposure to energy prices. In that case, Chevron is going to be the winner. Notably, the reliable dividend it pays will make it a better choice for income investors than pure-play energy producers, where oil prices can create massive volatility on the income statement.