Choosing Reliable Dividend Stocks: Why Devon Energy Might Not Be Your Best Bet

Investing in the energy sector can be unpredictable, especially for those seeking stable dividends. While some companies thrive in fluctuating markets, others present challenges that dividend investors should consider. Here, we’ll explore why Devon Energy (NYSE: DVN) may not be ideal, and why Enterprise Products Partners (NYSE: EPD) and Enbridge (NYSE: ENB) stand out as better options.

Understanding Devon Energy’s Business Model

When one thinks of “energy sector,” images of oil wells often come to mind. Devon Energy fits this description as a company focused on the extraction of oil and natural gas. The firm has a low breakeven cost of about $40 per barrel, enabling it to remain profitable despite fluctuating oil prices. Devon also boasts more than a decade’s worth of drilling opportunities, allowing it to grow production while addressing declining wells.

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Despite these strengths, Devon’s financial performance hinges on the volatile prices of oil and natural gas. As a result, both revenue and earnings can fluctuate significantly, complicating matters for dividend investors. The company’s variable dividend policy allows for changes in payouts based on financial results, which can be an issue for those seeking steady income.

Enterprise and Enbridge: Stability in Midstream Operations

Conversely, midstream companies like Enterprise and Enbridge operate differently. These firms own essential infrastructure, such as pipelines, which transport oil and natural gas. They earn revenue by charging fees for the use of these facilities, resulting in more consistent cash flows. Notably, their performance relies more on energy demand than on commodity prices, offering a reliable source of income even when prices are low.

Enterprise, structured as a master limited partnership (MLP), has consistently increased its dividend for 26 years, currently offering a notable 7.2% yield. Similarly, Enbridge, based in Canada, has raised its dividend in Canadian dollars for 29 consecutive years, boasting a 6.5% yield. Both companies have established histories of reliable dividend growth, making them appealing options for investors.

Although Enterprise and Enbridge focus on different aspects of their businesses, both are built to generate reliable cash flows. Enbridge has been shifting towards natural gas and renewable energy solutions, while Enterprise remains dedicated to its core operations, often emphasizing natural gas. Regardless, both companies provide dependable income streams for investors.

A Key Decision for Dividend Investors

While Devon Energy has its merits as a respected energy producer, it may not be the best fit for dividend investors seeking stability. The volatile nature of energy production can lead to unpredictable dividends. In contrast, companies like Enterprise and Enbridge operate in an environment that fosters consistent cash flows, allowing for more reliable dividends. Given the attractive yields from these midstream firms, long-term dividend investors should consider them as compelling investment choices.

Is Enbridge the Right Investment for You?

Before making an investment decision regarding Enbridge, it’s essential to consider various factors:

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Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends 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.