Since the war in Iran has spilled over into the energy sector and sent oil and gas prices surging, investors have been flocking to energy stocks, hoping to capitalize on the expected profit gains. It’s mostly why the energy sector has been the stock market’s best performer so far this year (based on S&P 500 sectors).
Despite the success of the energy sector, you don’t want to find yourself chasing profits based on every changing headline or event. Ideally, you’d invest in an energy stock that lets you do that and makes sense to hold onto for the long haul. The following three options fit that description.
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Chevron(NYSE: CVX) is a great option because of its sheer scale. It operates in all phases of the oil and gas pipeline, from exploring and extracting crude oil to selling it to you at your gas station. Having a hand in all major phases helps make Chevron’s cash flow more reliable, rather than leaving it at the mercy of crude oil prices.
The current war in Iran and geopolitical events in the Middle East further show the value of a “safe” energy play that isn’t entirely tied to the region (less than 5% of its portfolio is in the Middle East). Chevron has operations in over 180 countries worldwide, but the vast majority are in the Americas. Its U.S. output is over 2 million oil-equivalent barrels per day.
The ups and downs are inevitable, but Chevron has a rock-solid balance sheet that ensures it can thrive through them. You can hold onto the stock for a while without thinking too much about it.
2. Enbridge
Enbridge(NYSE: ENB) works in the midstream portion of the energy supply chain. It doesn’t drill for oil or sell you gas; it owns many of the pipelines used to transport oil and gas. It’s often the overlooked part of the energy supply chain, but it’s as vital as the drilling itself.
Enbridge serves around 75% of North America’s refineries and transports around 20% of all gas used in North America.
There are many regulatory and environmental hurdles to building new pipelines, so a large part of Enbridge’s competitive advantage stems from the high barriers to entry. It doesn’t make its business foolproof by any means, but it creates a geographic moat and enables Enbridge to leverage its existing infrastructure. You can think of it like a tollbooth.
3. ConocoPhillips
ConocoPhillips(NYSE: COP) is also a pure-play energy stock, but instead of focusing on pipelines and logistics like Enbridge, it focuses solely on exploring for crude oil, extracting it, and selling it to companies like Valero and Phillips 66. It’s the world’s largest independent company doing so.
Since ConocoPhillips focuses only on extraction, its profits are highly tied to oil prices, but the main thing working in its favor is scale and a lower cost structure. It’s widely regarded as the most efficient oil driller in the world.
Each company has a dividend worth paying attention to
A major appeal of investing in many energy stocks is their dividends, and these three are no different. Each stock has an above-average dividend, but they go about it slightly differently.
Chevron has your typical quarterly dividend, currently sitting at $1.78. At the time of this writing, its yield is around 3.6%, slightly below its 4% average over the past five years. With Chevron, you know you’re getting consistent dividend payout increases. It has increased its annual dividend for 39 consecutive years.
Enbridge’s dividend yield is around 5%, but it works a little differently than typical dividends. Enbridge focuses on “distributable cash flow,” which is cash from its operations minus items such as asset maintenance. It aims to pay out 60% to 70% of its distributable cash flow, so its performance affects how much it ultimately returns to investors.
Enbridge’s distributable cash flow was $1.76 per share ($3.85 billion total) in the first quarter, and it has 31 consecutive years of payout increases under its belt.
ConocoPhillips doesn’t have a traditional set-in-stone dividend. It has a base dividend that’s paid quarterly, as well as a variable dividend when oil and gas prices are high and the company has extra cash flow coming in. Its past three quarterly payouts have been $0.84 each (2.7% current yield).
Energy stocks are traditionally cyclical, but reliable, attractive dividends can help hedge losses when the sector is lagging and compound returns when it’s booming. The key is to stay invested for the long haul, and these three stocks are good for that.
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Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron and Enbridge. The Motley Fool recommends ConocoPhillips and Phillips 66. The Motley Fool has a disclosure policy.
