If you are in the market for high-yield stocks, you are probably trying to live off of the income you generate. That’s a wise decision, but one that requires extra care when you think about individual investments. In other words, a high yield alone isn’t enough information to go on. You need to dig deeper.
This is why Enbridge (NYSE: ENB) and Enterprise Products Partners (NYSE: EPD) are high-yield stocks worth taking a closer look at and Devon Energy (NYSE: DVN) is a stock you should probably avoid. Let me explain.
These energy stocks are boring but reliable
When it comes down to it, dividend investors put excitement low on their priority list when examining potential investments. At the top of the list is most likely a reliable income stream. And right up there with it is a revenue stream that trends higher over time. On that score, Enbridge has increased its dividend annually for 28 consecutive years while Enterprise has increased its distribution for 25 years. That consistency strongly suggests a huge amount of reliability, especially when you consider that both companies operate in the highly volatile energy sector. The key is that they are midstream providers.
Midstream companies own the infrastructure, like pipelines, that help to move oil and natural gas, and the products into which they get turned, around the world. Enbridge and Enterprise charge fees for the use of these product-moving assets, which creates a very reliable income stream. That means demand is more important than commodity prices for most midstream companies. And demand for energy tends to remain robust even during energy downturns.
On top of that, both Enbridge and Enterprise are investment-grade rated. So they have strong balance sheets to help them weather any weak patches that may come along. They also have reasonable distribution policies, so there is room for adversity before their dividends would be at risk.
In other words, Enbridge and Enterprise are built to be reliable income stocks. If you are trying to maximize the income your portfolio generates, you’ll probably want to look at each given the attractive 7.3% and 7.4% respective yields.
This dividend stock is variable by design
Having a steadily growing dividend is great, but it isn’t the only dividend policy you’ll find in the energy patch. At the complete opposite extreme is Devon Energy. This company operates in the upstream segment, producing oil and natural gas. That means that its top and bottom lines are almost entirely dependent on highly volatile commodity prices. Good years can be great, but bad years can be brutal.
To reward investors during the good years Devon has chosen to institute a variable dividend policy that is tied to the company’s financial performance. It is a fairly efficient and direct way to ensure that investors benefit from high energy prices, but it requires shareholders to accept the hit when energy prices decline and the dividend gets cut. The change can be dramatic; the third-quarter 2022 dividend stood at $1.55 per share and one year later it had fallen to just $0.49. That’s a level of volatility that will probably put most dividend investors off, even though the stock’s current 6.7% yield looks very attractive.
Know what you own
At the end of the day, the big story here is that a high yield alone isn’t enough to make any investment a buy. You need to dig a bit deeper to understand the company behind the yield. Enbridge and Enterprise are built to provide shareholders with reliable income. Devon Energy isn’t.
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Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
2 Ultra-High-Yield Energy Stocks to Buy Hand Over Fist and 1 to Avoid was originally published by The Motley Fool
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