Should You Ignore Chevron and Buy This Magnificent High-Yield Energy Stock Instead?

When it comes to investing in the energy sector, Chevron (CVX) is often a top choice for its strong dividend and diversified operations. However, there's another high-yield energy stock that might be even more attractive for income-focused investors: Enterprise Products Partners (EPD). Let's explore why EPD could be a magnificent alternative to Chevron.


1. **Midstream Stability vs. Integrated Volatility**

Enterprise Products Partners focuses on the midstream sector, which involves transporting and storing energy products. This business model generates fees based on the volume of energy products passing through its system, making its cash flows less sensitive to commodity price fluctuations. In contrast, Chevron's upstream and downstream operations are more volatile, driven by commodity prices. This difference in business models makes Enterprise's cash flows more predictable and less susceptible to market fluctuations.


2. **Distribution Coverage and Safety**

Enterprise Products Partners boasts a strong distribution coverage ratio of 1.7 times, indicating ample room for adversity before a distribution cut. This, coupled with its 7.2% yield, provides investors with a reliable and attractive income stream. Chevron, while having a solid dividend payout ratio of 4.3% and a 37-year streak of annual increases, may not offer the same level of safety as EPD.

3. **Growth Potential**

While both companies offer attractive yields, EPD's midstream business model provides more stable cash flows. This stability, coupled with its 26-year history of annual distribution increases, suggests a higher likelihood of consistent growth. In contrast, Chevron's upstream and downstream operations are more volatile, which can impact its dividend growth.

4. **Balance Sheet and Debt Management**

Enterprise Products Partners' strong balance sheet and conservative debt management strategies enable it to maintain and grow its distribution. EPD's investment-grade balance sheet, with a debt-to-equity ratio of 0.67, provides ample financial flexibility. Its cash flow covers the distribution by a robust 1.7 times, allowing for distribution growth even during industry downturns. In contrast, Chevron uses debt strategically during industry downturns to support its business and dividend, but its higher debt levels may pose more risk.


In conclusion, while Chevron is a well-run energy company with a strong dividend, Enterprise Products Partners offers a more attractive combination of high yield, stable cash flows, and consistent distribution growth. EPD's focus on the midstream sector, strong balance sheet, and conservative debt management strategies make it a magnificent high-yield energy stock that income-focused investors should consider.