Three dividend-paying energy stocks to buy by hand in May

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There's one vital aspect of the energy sector that you can't ignore: oil and natural gas prices are highly volatile. This means that you have to look at the risks with open eyes, even when energy prices are high. But income investors needn't worry, as there are multiple ways to collect dividends in the energy sector and there's likely one that's right for you, regardless of your risk appetite.

Here's why you'll want to take a closer look Partners for business products (NYSE:EPD), Chevron (NYSE: CVX)And Devon Energy (NYSE: DVN) as May gets underway.

Enterprise helps get everything moving

The energy sector is broadly divided into three segments: the upstream sector, which deals with oil and gas production; the downstream phase, which involves refining and chemicals; and the midstream, which connects the upstream to the downstream.

Midstream companies, such as those from Enterprise Products Partners, typically charge fees to use the vital services pipeline, transport, storage and processing resources that they own. The price of the raw materials flowing through the system is not nearly as important as energy demand, which tends to remain robust even when oil prices are low.

The fees Enterprise charges provide a reliable flow of money to pay benefits. The master limited partnership (MLP) has increased its distribution annually for 25 consecutive years. Meanwhile, the benefit was covered 1.7 times by distributable cash flow in the first quarter of 2024, meaning there is little risk of a benefit cut.

The massive 7.4% distribution yield will likely account for the majority of an investor's returns over time, but if you're looking for big returns in the energy sector, Enterprise Products Partners is a good way to to obtain that.

Chevron is the 'safe' way to invest in oil

While Enterprise tries to avoid the riskiest aspect of the energy crisis, Chevron is trying to reduce risk in a different way. For starters, it has diversified its operations across all three segments of the industry. The upstream, midstream and downstream all tend to have different business dynamics, which helps soften the impact of the ups and downs inherent in energy markets over time.

Oil prices will still be the key driver of Chevron's results, but the swings won't be as large as for a purely upstream or downstream company.

Furthermore, Chevron has one of the strongest balance sheets among its integrated energy sectors, ending 2023 with a debt-to-equity ratio of just 0.12. If oil prices collapse, the country will have plenty of room to take on debt to continue financing its operations and shareholder dividends.

That's where Chevron's impressive streak of 37 annual dividend increases comes into play. The energy industry has gone through some very big swings over the past three decades, including during the coronavirus pandemic, when the U.S the oil price even fell below zero on a certain moment. Through it all, Chevron continued to support its dividend and reward investors for their loyalty. If dividend consistency is important to you, this is a stock you'll want to get to know very well. The dividend yield today stands at an attractive 4%.

Devon Energy gambles on energy prices

Even if you're not particularly interested in playing it safe, there's still a dividend option for you. Devon Energy is a US-based upstream energy producer. The top and bottom are linked to the price of oil and natural gas. When oil prices rise, the company's performance will benefit. If oil prices fall, financial results will suffer.

This is critical to understand because Devon Energy has a variable dividend policy that is tied to its financial performance. The dividend yield currently stands at 4.7%, but given the way the company approaches the dividend, you shouldn't put too much weight on that. The dividend payment will change.

Because energy prices are so important to Devon's financial results and dividend, the shares tend to be affected by the ups and downs of commodity prices. That's a big risk that more conservative investors probably don't want to take. But if you take a step back, just when your real energy costs are rising, for things like heating and petrol, Devon should increase its dividend.

In other words, it gives you a little more money when you need it most. Of course, the dividend will be cut if oil prices fall, but at that point your real energy costs should drop as well. Devon is a complicated story for a dividend investor, but if you think a little more strategically about your investments, you may find this is the perfect option for you.

Something for every dividend investor

If you are an investor who puts safety first, Enterprise will likely be attractive to you. If you're looking for a little energy exposure but don't want to bet on the house, the diversified and reliable Chevron may be your best bet. If you can handle more risk, Devon's variable dividend could be for you. All three have a lot to offer dividend investors, including attractive returns, as we enter May.

Should you invest $1,000 in Enterprise Products Partners now?

Before purchasing shares in Enterprise Products Partners, consider the following:

The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Enterprise Products Partners wasn't one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.

Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $544,015!*

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Ruben Gregg Brouwer has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Chevron. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has one disclosure policy.

Three dividend-paying energy stocks to buy by hand in May was originally published by The Motley Fool

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