In your working years, you're focused on saving as much as you can to create a sizable nest egg. When you reach retirement, the focus shifts to living off of what you have saved. One way to make that easier is by investing in dividend stocks.
With oil prices rocketing higher lately, here are three energy names that offer dividends that are worth a close inspection: Enbridge (NYSE: ENB), Magellan Midstream Partners (NYSE: MMP), and ConocoPhillips (NYSE: COP).
1. Embridge: A Diversified Canadian giant
With a market cap of about $90 billion, Enbridge is one of the largest midstream companies in North America. Basically, it helps move oil and natural gas around the continent and world. However, oil pipelines make up the vast majority of its business, accounting for 58% of earnings before interest, taxes, depreciation, and amortization (EBITDA). Most of the rest, meanwhile, is tied to natural gas pipelines (26% of EBITDA) and a gas utility business (12%). Natural gas is considered a transition fuel in the world's shift toward clean energy. The remaining 4% of EBITDA is, in fact, in clean energy investments like offshore wind farms.
Image source: Getty Images.
This breakdown is important because Enbridge is using the reliable cash flows from its heavily fee-based oil operations to expand into cleaner areas. So you are benefiting from today's oil demand but will also own a company that's changing with the times. And it offers a fat 6% dividend yield backed by a dividend that's been increased for more than 25 consecutive years. (Enbridge is a Dividend Aristocrat.) Largely avoiding the ups and downs of oil prices, Enbridge is a good oil-focused income play for those seeking a mixture of safety and consistency.
2. Magellan: A doubled-down midstream play
If Enbridge's diversified portfolio moves too far away from oil for you, master limited partnership (MLP) Magellan might be more your speed. While it also operates in the midstream space, its assets are concentrated between oil (around 30% of margins) and refined products transportation and storage (about 70%). Basically, it helps companies move oil and the products into which oil gets turned, like gasoline and jet fuel. The distribution yield is a hefty 8.5%.
Part of that high yield is related to Magellan's oil focus, given that oil isn't exactly an ESG-friendly investment. But another part is because Magellan's cash flows only cover its distribution by around 1.2 times or so. Historically that's been considered strong coverage in the MLP space, but some of its peers have begun to increase their coverage metrics.
And yet, when demand for its systems fell in 2020, Magellan managed to support its distribution just the same. The payment has now been increased annually every year since the MLP's IPO in 2001. If you can handle a little more risk and a lot more focus on oil, this could be a good oil option for your income portfolio.
3. ConocoPhillips: Jumping in with both feet
The last name here, ConocoPhillips, is an odd duck when it comes to dividends. It has a regular dividend that it pays four times a year. And on top of that, it may pay a variable dividend at different dates than the regular dividend, based on its performance as a company. That means an investor can get up to eight dividend payments from this driller, with more and higher dividends likely when oil prices are lofty.
There are a couple of key takeaways here. First, if oil prices are low, the total dividend ConocoPhillips pays will likely be low too, because the variable payment will fall. Second, the company's drilling performance takes outsized importance, so the shares will likely rise and fall along with oil. This helps explain the miserly 1.4% dividend yield today. But if you're looking for a dividend play with direct oil exposure, it doesn't get more direct than ConocoPhillips. However, as you might guess, this would not be a good fit for risk-averse investors.
Safe, less safe, and bold
Enbridge is an oil-heavy name with a big yield and a plan to shift its business toward cleaner alternatives with the rest of the world. It's an oil punt, if you will. Magellan's fat distribution is supported by a business that is tied tightly to oil and the products into which it gets turned. While revenues are fee-based, Magellan and its unitholders are clearly betting that oil remains a key commodity for years to come. And ConocoPhillips is for investors that like to swing for the fences at the risk of striking out, to mix up the sports metaphors. If oil is dear, the dividends here are likely to be generous. If oil is low, so, too, will be the dividends. One of this trio should fit your oil dividend needs.
10 stocks we like better than Enbridge
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and Enbridge wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of March 3, 2022
Reuben Gregg Brewer owns Enbridge. The Motley Fool owns and recommends Enbridge. The Motley Fool recommends Magellan Midstream 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.
