Dividends are a direct return on your investment, but not all dividends are created equal. If you are using dividends to supplement Social Security in retirement, you need to focus on companies that have proven they can support their dividend through thick and thin. In the energy sector, rising oil prices will make it easier for riskier companies to pay big dividends.
Dividend investors should err on the side of caution rather than reach for yield in the current environment. If you want direct oil exposure, ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) are solid options. However, you can gain exposure to the energy sector while minimizing commodity exposure through midstream businesses such as Enterprise Products Partners (NYSE: EPD) and Enbridge (NYSE: ENB). Here’s why these four reliable dividend payers should be on your short list right now.
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When oil prices are high, oil companies can make a lot of money. When oil prices eventually fall, as they always have historically after price spikes, oil companies will see their results weaken. If you are a long-term dividend investor, you want to own companies that can pay you through the entire cycle. Exxon and Chevron both have more than a quarter-century of annual dividend increases behind them. Exxon’s yield is 2.7%, while Chevron’s yield is 3.7%.
Both Exxon and Chevron have businesses that span the entire energy sector, from the upstream (production) to the midstream (pipelines) to the downstream (chemicals and refining). This diversification helps to blunt the impact of the industry’s swings. On the topic of diversification, they also have geographically diverse portfolios, so events in one area won’t derail the entire business. And they have extremely strong balance sheets, which allow them to take on debt to support their business and dividends when oil prices are weak. Exxon and Chevron are the kinds of dividend-paying energy stocks you can buy and comfortably hold for the long term.
However, you still have options if you don’t really want to take on commodity risk. The midstream is filled with high-yield investments backed by fee-based business models. These are not commodity-driven operations like upstream and downstream businesses are.
