High-Yield Energy Stocks: A Surprising Alternative to Chevron
When it comes to well-run energy companies, Chevron (NYSE: CVX) is often top of mind. With a 4.3% dividend yield and 37 years of consecutive annual dividend increases, it’s a compelling option for income investors. However, if yield is your primary concern, you may want to consider an alternative: Enterprise Products Partners (NYSE: EPD).
The Integrated Energy Major
Chevron is an integrated energy major, meaning it operates in multiple segments of the energy sector, including energy production (upstream), energy transportation (midstream), and chemicals and refining (downstream). This diversification provides a level of stability, making it an attractive option for those seeking broad energy exposure.
The Volatility Factor
However, Chevron’s upstream and downstream operations are heavily influenced by commodity prices, leading to volatile financial results. This volatility can be a challenge for conservative investors seeking steady returns.
A High-Yield Alternative
Enterprise Products Partners, a master limited partnership (MLP), offers a more reliable option. With a 7.2% yield, it operates in the midstream segment, owning vital energy infrastructure such as pipelines. By charging fees for the use of these assets, Enterprise generates consistent cash flows, regardless of commodity prices.
Reliable Cash Flows
Enterprise has increased its distribution every year for 26 consecutive years, with a distributable cash flow that covers its distribution by 1.7 times. This provides a significant margin of safety against potential adversity.
Why the High Yield?
The high yield is largely due to the fact that it will make up the majority of an investor’s return over time. With low-single-digit distribution growth expected, the total return approaches the 10% expected from the broader market.
A Better Choice for Yield-Focused Investors
While Chevron is a well-run energy company, Enterprise Products Partners may be a better fit for conservative income investors seeking a high yield from a reliable business. Its midstream focus and consistent cash flows make it an attractive alternative for those prioritizing yield over diversification.
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