Devon Energy is a good energy stock, but not a great income stock. These two alternatives will be better options for most income investors.
Devon Energy (DVN -0.49%) just agreed to buy the Williston Basin business of Grayson Mill Energy, further expanding its onshore U.S. footprint. Just days after that news, Devon reported that it was already achieving record production levels. If you are looking for a pure-play energy producer, Devon should probably be on your list of candidates. But if you are also looking for dividends, well, you might want to consider these two other energy stocks instead. Here’s why.
The problem with Devon Energy’s dividend
Devon Energy’s dividend yield is listed at around 4.4% by online quote services. That is a pretty attractive number, given that the S&P 500 index is only yielding 1.2% and the average energy stock, using Energy Select Sector SPDR ETF (NYSEMKT: XLE) as an industry proxy, has a yield of 3.1%. The problem is that the 4.4% yield listed is something of a mirage.
The problem isn’t the data feed, it’s Devon’s dividend. The top and bottom lines for this pure-play energy producer are inherently driven by volatile oil and natural gas prices. That means revenue and earnings can swing wildly at times. Devon has decided that the best way to reward investors during the good times, while protecting its business during the bad, is to have a variable dividend policy. That way the dividend rises along with energy prices, but falls with them, too. The end result is that you can’t really trust the dividend yield figure because, by design, it will change. That won’t be agreeable to most dividend investors and particularly to those trying to live off of the income their portfolio generates in retirement.
Chevron is a through-the-cycle dividend stock
Chevron (CVX 0.36%) also has a dividend yield of around 4.4%, but its dividend has been increased annually for 37 consecutive years. The big difference between this energy giant and Devon is that Chevron’s business is spread across the upstream (energy production), midstream (pipelines), and downstream (refining and chemicals). This helps to soften the blow from volatile energy prices, since the different segments of the energy sector perform differently at different times.
Chevron increases its resilience by making sparing use of leverage. Its debt-to-equity ratio is currently around 0.15 times, which would be low for any company. But that low leverage during the good times gives Chevron the leeway to add leverage during the bad times, supporting both its business and dividend-paying abilities through the entire energy cycle. To be fair, Chevron probably won’t be as rewarding a stock to own while energy is rising, but for most income-oriented investors that will be more than made up for by the company’s dividend resilience during energy crashes.
Enbridge is a boring and reliable dividend grower
Enbridge (ENB 1.57%) is even more conservative than Chevron, as it hails from the midstream segment of the energy sector. The midstream largely charges fees for helping to connect the upstream to the downstream (and the rest of the world) via vital energy infrastructure assets, such as pipelines. Thus, energy demand is more important than energy prices. Energy demand tends to remain robust even during industry downturns. This is how Enbridge has increased its dividend annually for 29 consecutive years. The yield is a huge 6.6%, supported by the reliable cash flows its assets generate.
But Enbridge isn’t just a midstream company. It also owns regulated natural gas utilities and clean energy assets, as it looks to provide the world with the energy it is demanding. Or, put another way, it is trying to shift its business along with the world as the world moves toward cleaner energy sources. The key, however, is that the company’s utility and clean energy assets are reliable cash-flow generators, too. So Enbridge is an attractive high-yield energy stock that will give you exposure to the energy sector and more, which might make it the best option for conservative, long-term income investors.
If you want reliable income, look beyond Devon Energy
Devon Energy is not a bad company. And its dividend could actually be an interesting way to hedge against real-world energy costs (for things like heating and transportation). However, it is not a good way to generate a reliable income stream. For that, you’ll be better off with Chevron, if you are looking for oil exposure; or Enbridge, if your primary goal is to maximize income over time.
