Energy is vital to modern society, and most investors should probably have some exposure to the industry. The problem is that the industry tends to be very volatile, given its commodity-driven nature. But if you have $500 to invest, you might consider putting it into these four energy giants, all of which pay reliable dividends.
Carbon-based fuels like oil and natural gas are vital to the world and will likely remain so for decades to come, but they remain commodities. Supply and demand, economic growth and geopolitical developments can all wreak havoc on energy prices.
Price fluctuations can sometimes be rapid and dramatic. Investors need to take this seriously when looking at energy-related stocks.
Image source: Getty Images.
In other words, the energy industry is divided into three major categories. Upstream are energy producers, midstream are pipeline companies, and downstream are chemical and refining companies.
Each segment has its own dynamics, with both upstream and downstream being commodity-based, and midstream being filled with fee-takers, providing more consistency. Choose wisely and you can turn a $500 investment into a reliable source of income.
For most investors looking to increase their energy exposure, the best option is an integrated energy major such as Exxon Mobil(NYSE:XOM) or Chevron(NYSE:CVX). Both companies have increased their dividends for decades, proving they know how to survive energy cycles while reliably rewarding investors. Two factors were critical to this success.
First, both ExxonMobil and Chevron have very strong balance sheets. This gives them room to leverage during industry downturns so they can continue to fund their operations and dividends until oil prices recover. (Historically, oil prices always recover.)
Second, ExxonMobil and Chevron have exposure to the entire energy industry and globally diversified investment portfolios. Having such broad exposure helps soften the peaks and valleys inherent in the industry. While neither industry leader will offer as much upside as pure-play drillers during an industry rebound, the downside may not be as dramatic. This is a good compromise.
ExxonMobil currently yields about 3.6%, and Chevron’s yield is 4.3%. Chevron’s valuation may be more attractive, but both are good options for long-term and broad exposure to the energy industry.
That said, if you’re an income-focused investor, there’s another path to take. As mentioned earlier, the midstream segment of the energy industry is dominated by toll-collecting businesses.
Industry giants such as Enterprise product partners(NYSE:EPD) and ambridge(NYSE:ENB) Own a large portfolio of potentially irreplaceable energy infrastructure assets. These are pipeline, storage, processing and transportation assets that help move energy commodities around the world. Enterprise and Enbridge essentially charge customers to use the critical infrastructure they own.
This tends to generate reliable cash flow through good energy markets and bad energy markets. In fact, for Enterprise and Enbridge, energy demand is more important than energy prices.
This demand tends to remain strong regardless of the price of oil at a given time. That’s why these two midstream companies have been delivering increased revenue to investors every year for decades.
Of course, this is attractive if you like reliable dividends, but it’s the yields Enterprise and Enbridge offer that really stand out. Enterprise is a master limited partnership (MLP) currently yielding a whopping 6.5%. Canadian midstream giant Enbridge has a yield of 6.1%.
If you’re specifically looking for high-yield energy stocks, Enterprise and Enbridge should be on your shortlist today.
Although the energy industry is volatile, the important nature of what it provides the world means every investor should have some exposure. If you have $500 or $5 million to invest, that’s it.
But you should make sure you put your money into the best investment possible. If you want broad industry exposure, ExxonMobil and Chevron are good options. Enterprise and Enbridge are good choices for dividend investors who want to pick reliable high-yielding options.
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Reuben Gregg Brewer works at Enbridge. The Motley Fool owns and recommends Chevron and Enbridge. The Motley Fool recommends enterprise product partners. The Motley Fool has a disclosure policy.
The Best Energy Stocks to Invest Now with $500 Originally Posted by The Motley Fool
