Before Buying Chevron or Enterprise Products Stock: Here’s 1 Energy Dividend Stock I’d Buy First

The past year has been painful for stock market investors. The S&P 500 Index, which tracks 500 of the largest U.S. stocks, is down 11% as of this writing on Sept. 21, and more than 19% below its 52-week high. Each sector is down at least 4% from its peak. The only equity sector that has generated explosive returns so far this year is the energy sector; the Energy Select Sector SPDR ETF is up 70.5% of total returns, of which almost 7% is due to dividends.

Needless to say, this has investors – especially those looking for dividends – very interested in energy stocks right now. Two in particular stand out: Chevron (CLC -0.08%) and Enterprise Product Partners (EPD -1.93%). This makes sense, given that they are both cash cow giants, with strong dividends yielding 3.6% and 7.2% respectively at recent prices. But before buying either of these two giants, investors should also take a close look Phillips 66 (PSX 1.23%)another diversified giant with a return of 4.6% and a better growth record of its payment.

What makes Phillips 66 different

Although Chevron and Enterprise Products are solid companies (I also own Enterprise Products), there are some Phillips 66 features that are very compelling. More importantly, these are elements that can make it a solid investment throughout the energy cycle, sustaining its dividend as we transition from today’s high oil prices to periods of oversupply that drive prices down. – and the profits of oil producers.

Like Chevron, Phillips 66 is a diversified and integrated oil and gas company. Its operations include midstream operations to collect, transport and store oil, gas and natural gas liquids; refining and petrochemical operations; and a downstream marketing company to sell and deliver these products to market. Its operations are international, giving it access to oil and gas from some of the largest and cheapest oil and gas fields in the world.

But where Phillips 66 differs from Chevron is that it has no upstream operations, meaning it does not produce oil or gas. There is an obvious downside to not being a producer, as it means missing out on the Upside down high oil prices. You can see how Chevron’s free cash flow has essentially tracked oil prices up and down over the past decade:

CVX Free Cash Flow Data by YCharts

Phillips 66 and Enterprise Products’ cash flow also rose and fell with oil prices, but not at Chevron’s extremes; that’s basically because its fixed costs to produce oil don’t go down when the market price of crude goes down, but they don’t go down either at the top when oil prices are higher.

So while it benefits from higher prices, it also feels the impact of lower prices on its bottom line in ways that Phillips 66 and Enterprise Products do not. And over time, this lack of downward price exposure makes the Phillips 66 dividend safer in my book.

The counter-argument is that since it doesn’t produce oil, it has to buy it to refine it, which means it pays higher prices when oil prices rise, which is bad for its bottom line. This is only partly true. Yes, it pays the highest price, but since refined products like gasoline and jet fuel are priced according to crude prices, Phillips 66 isn’t really affected by that. On the contrary, one of its advantages is its advanced refineries. Since not all crude oils have the same chemistry, not all oils can be processed at any refinery. Phillips 66 has long been able to purchase crudes cheaply that other refiners cannot process, thereby increasing its refining margins.

At the other end of the spectrum are enterprise products. And while it’s a great company, it’s less diverse and very focused on the middle space where all the oil and gas logistics take place. He is skilled in this area, having generated an average return on investment of 12% over the past decade. This focus on the midstream has been very good for slow and steady distribution growth, but it hasn’t delivered an excellent total return investment. The latter and Chevron have significantly underperformed the S&P 500 over the past decade.

Phillips 66, on the other hand, actually performed slightly better than the market. This was a rare outperforming energy stock during the tech stock boom of the past decade.

CVX Total Return Level Chart

CVX Total Return Level Data by YCharts

Much of this higher yield has been Phillips 66’s superior dividend growth. Since becoming a standalone public company in 2012, Phillips 66 has increased its dividend by almost quintuple, while payments from Chevron and Enterprise Products increased 58% and 50%, respectively. It has also taken serious steps to position itself as a leader in biofuels, which should pay off as we move away from fossil fuels in the decades to come.

Why Phillips 66 is particularly attractive now

In recent months, falling oil prices and economic concerns have pushed investors to push even energy stocks lower; of this group, shares of Phillips 66 are down more than 25% and are actually down more than 30% from their pre-COVID highs. I think Mr. Market once again overreacted due to short-term concerns, creating a terrific price to buy this long-term winner at a bargain price. With a dividend yield well over 4.5% and a long list of dramatic dividend increases, Phillips 66 seems like a better buy than Chevron or Enterprise Products right now.

Jason Hall holds positions at Enterprise Products Partners and Phillips 66. The Motley Fool holds positions and recommends Energy Select Sector SPDR. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.

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