2 Safe Dividend Stocks Wall Street Sleeps On
OPrices plunged in 2020, with West Texas Intermediate crude falling below zero for a brief while. Since then, oil prices have risen sharply, and even after retreating from this year’s highs, they now sit just under $100 a barrel.
It’s a wild roller coaster ride. But if you’re drawn to the energy sector for its passive income opportunities, you can invest without having to take on so much uncertainty. Here’s why dividend investors looking for energy stocks are likely to prefer Enbridge (NYSE: ENB) and Enterprise Product Partners (NYSE:EPD).
A terrible and not good year
The volatility that investors in the energy sector have had to deal with lately is hard to overestimate. ExxonMobil saw its earnings of $2.25 per share in 2019 turn into a loss of $0.33 per share in 2020 as pandemic shutdowns led to reduced demand for oil and a drop in oil prices. While the oil giant’s earnings rebounded sharply to $5.38 per share in 2021, the jump only further highlights the volatility inherent in the commodity-driven energy sector.
But business was much more stable elsewhere in the industry. Enterprise’s distributable cash flow fell just 3% in 2020, and that cash flow covered its distributions by 1.6 times. Enbridge’s distributable cash flow actually increased in 2020, increasing by approximately 2.2%, and it covered its distributions by approximately 1.4 times. That’s a lot of stability in the face of a deep market downturn that has led to red ink at some of the biggest energy companies.
If you’re looking for an income-generating energy stock to add to your portfolio, this pair should look pretty good right now. But from a passive income perspective, there’s even more to love. Enterprise has increased its distribution every year for 24 consecutive years, if you include the 2022 increase. Enbridge has an even better track record, with 27 years of annual increases. And then we have the generous yields, with Enterprise at 7.7% and Enbridge at 6.5% in Thursday’s session.
Why are they different?
Enbridge and Enterprise manage to avoid the volatility of the energy sector by operating in what is called the middle space.
Broadly speaking, there are three different niches in the energy industry. On the one hand, the upstream industry, which produces oil. The results here are determined by commodity prices. On the other side, downstream companies, refining and chemicals, which earn the difference between the final prices of gasoline and other refined products and the prices they have to pay for their raw materials (oil and gas natural). Again, commodity prices are key to financial results.
Intermediate companies, in general, connect the two sides. The pipelines, storage, processing and transmission assets that Enterprise and Enbridge largely own charge user fees. It’s a bit like managing a toll booth. As long as oil and other products flow through the system, these two North American midstream giants get paid. The price of what goes through their systems is much less than the demand.
This difference has translated into fairly consistent performance, even during downturns in the energy industry. But investors still treat Enterprise and Enbridge the same as other energy companies. For example, shares of Exxon are down 19% since their peak in June. Enterprise is down 13% and Enbridge down 12% despite not really being exposed to the same commodity volatility. This is an opportunity for long-term investors who understand the very different dynamics at play here.
Not perfect but still a good energy option
If you are looking for an energy company to add to your portfolio, Enterprise and Enbridge should be on your shortlist. Not only do they offer generous and well-sustained returns, but they also allow you to avoid the volatility inherent in this largely commodity-based sector.
To be honest, you won’t be able to avoid the ups and downs in the energy sector, as investors tend to throw the baby out with the bathwater. But if you’re looking for reliable passive income, the dips here could actually be viewed as buying opportunities, as the fees that drive Enbridge and Enterprise’s bottom line aren’t really tied to oil prices.
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Reuben Gregg Brewer holds positions at Enbridge. The Motley Fool fills positions and endorses Enbridge. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.