Now that October is underway, there is no one way to play in the energy sector, but that is not new. There have always been different tactics for investing in this volatile Wall Street niche. The question is, which tactic is right for you?
Below are three of the top energy stocks you should consider when trying to answer that query: Devon Energy (NYSE: DVN), Chevron (NYSE: CVX)and Enbridge (NYSE: ENB). Let’s see what makes them potential investments this month.
1. Devon Energy is like jumping in with both feet
Devon Energy operates exclusively in the upstream segment of the energy sector. That means it produces oil and natural gas. There are very big implications to this approach, the most notable being that Devon’s revenue and results depend almost entirely on the price of the raw materials it sells. Don’t underestimate the effect this can have on the company’s share price, financial performance and dividends. Oil and natural gas are known for their dramatic and often rapid price changes.
Devon exacerbates the effect by having a variable dividend policy. So when energy prices are high, the dividend will be high, but when energy prices are low, the dividend will be low. It’s an elegant way to ensure that shareholders benefit directly from high oil prices. But it’s not something an investor looking to live off his dividend checks is likely to appreciate.
In fact, investors should not consider the dividend yield (currently around 5%) as a reliable indication of the income this stock will generate over time. This stock is most appropriate for investors who believe oil prices will rise, or at least remain at their current levels.
That said, Devon is a highly respected energy producer. It has an investment grade-rated balance sheet and surpassed its volume guidance in the second quarter of 2024. It is expanding through acquisitions, has a fairly low breakeven point (about $40 per barrel of oil), and is more than a decade old. of drilling inventory. There are many things to like, but be prepared to face the ups and downs of energy prices.
2. Chevron is like slowly dipping into water
Chevron also operates upstream, but that is only part of its business. As an integrated energy company, it also operates in the midstream (pipelines) and downstream (chemicals and refining). This diversification, along with a global footprint, helps smooth out the peaks and troughs of oil and natural gas prices. Energy prices remain the driving force of Chevron’s revenues and results, but the business simply will not be subject to the severe performance swings that a sole producer would be.
But what really sets Chevron apart from other options in the energy sector is its balance sheet. The company’s debt-to-equity ratio is the lowest among its closest peers, at about 0.15 times. That gives it room to increase leverage during energy crises so it can continue to invest in its business and pay dividends to shareholders. It should be noted that the dividend has been increased for 37 consecutive years. Now add to this the fact that the yield today is approximately 4.3%, and you can see why Chevron would be a good choice for dividend investors looking to add a permanent position in the energy sector to their portfolios.
3. Enbridge is like just dipping your toes in
The last stock to consider is Enbridge, which is a giant North American midstream company. Midstream companies own vital energy infrastructure, the use of which they charge their customers. There are some important facts to consider here. The energy sector cannot function without pipelines, the storage and transportation assets that Enbridge owns. Energy demand is more important than the price of goods flowing through Enbridge’s system. And energy demand tends to remain strong even when oil prices are low. Overall, Enbridge has a long track record of producing reliable cash flows.
Those cash flows support the stock’s attractive 6.5% dividend yield. That dividend has been increased annually for 29 consecutive years. If you’re looking for a large, reliable income stream, Enbridge has you covered.
There’s another interesting story here, because one of the company’s main goals is to provide the world with the energy it needs. To that end, it has been expanding into the regulated natural gas and clean energy utility sectors, which together account for about 25% of earnings before interest, taxes, depreciation and amortization (EBITDA). So not only is Enbridge a solid high-performing option in the energy sector, it’s also something of a hedge as the world moves toward cleaner energy options.
There are multiple ways to play the energy sector
As the trio of stocks presented here shows, the energy sector is not a one-size-fits-all issue. There are different ways to invest, depending on how you want to add energy exposure to your portfolio.
The most aggressive option here is Devon Energy, the exclusive producer. Chevron is something of a middle-of-the-road option that should hold up well throughout the energy cycle and likely continue to pay you a reliable dividend even during industry downturns. Enbridge is a reliable cash flow generator with a great dividend yield for investors trying to maximize their income stream. One of these top power options should meet your needs if you’re looking for a power reserve in October.
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Reuben Gregg Brewer has positions at Enbridge. The Motley Fool has positions and recommends Chevron and Enbridge. The Motley Fool has a disclosure policy.
The Top 3 Energy Stocks to Buy in October was originally published by The Motley Fool