Better Dividend Stock: Chevron vs. Enbridge

Key Points

• Chevron is one of the largest energy companies on the planet and has a lofty 4.4% yield.

• Enbridge is one of the largest midstream operators in North America and has a 5.8% yield.

• The choice between Chevron and Enbridge will boil down to more than just yield.

• 10 stocks we like better than Chevron ›

If you are looking at the energy sector and trying to find an attractive dividend stock, you’ll probably find both Chevron (NYSE: CVX) and Enbridge (NYSE: ENB) on your radar screen. That makes total sense, as both have large yields and each one is an industry-leading business. But should you buy Chevron and its 4.4% yield or Enbridge and its much higher 5.8% yield? It requires a look beyond the dividend to make the final call.

What does Chevron do?

Chevron is an integrated energy company. That means that it operates in the upstream (energy production), midstream (pipeline), and downstream (refining and chemicals) segments of the broader energy sector. Energy prices will always play a big role in determining the company’s revenue and earnings. However, each segment of the industry operates a little differently, so the diversification across the sector helps to soften the peaks and valleys of often volatile energy prices.

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On top of being an integrated energy company, Chevron also has a rock solid balance sheet. With a debt-to-equity ratio of around 0.2, it has one of the strongest financial positions among its closest peers. This allows management to take on debt during energy downturns so it can continue to support its business and dividend. When energy prices recover, as they always have historically, Chevron pays down debt. The proof of the company’s resilience is highlighted by the 38 consecutive annual dividend increases it has provided to investors.

Image source: Getty Images.

What does Enbridge do?

Enbridge’s business is more focused. It operates largely in the midstream sector, with pipeline operations accounting for around 75% of its earnings before interest, taxes, depreciation, and amortization (EBITDA). The midstream is the most reliable segment of the energy sector because companies like Enbridge basically just charge fees for moving oil and natural gas through their energy transportation systems.

The rest of the business is largely tied to regulated natural gas utilities that operate in both Canada, Enbridge’s home country, and the United States. These are reliable cash generators, too. The company also has a small amount of exposure to the clean energy sector, which ties into its long-term goal of providing the world with the energy it needs. It is a hedge, of sorts, as the world shifts from dirtier fuels to cleaner ones.

All in all, Enbridge is a slow and boring business. And that flows through to the dividend, which has been steadily increased, in Canadian dollars, for three decades. However, it is a much more reliable business than Chevron. And that’s where the big choice comes in for investors.

Buy Chevron or Enbridge?

Chevron and Enbridge are both well-run companies with reliable dividend histories. Chevron has a lower dividend yield, so if you are focused on income Enbridge will win out. Also, if you are a conservative investor, Enbridge’s midstream-focused business will probably be preferable. But Enbridge won’t provide you direct exposure to oil and natural gas, which is what you get when you buy Chevron. If you have a constructive view of energy prices, Chevron would be a better energy bet.

Which one wins really depends on your investment goals. For me, Enbridge is in my portfolio and not Chevron. My direct play on energy is integrated energy giant TotalEnergies (NYSE: TTE) for a very specific reason. Like Enbridge, TotalEnergies has already started to invest in the clean energy sector. Chevron has largely stuck to its oil and gas roots, making it a more direct play on energy prices. If that’s what you want, reliable dividend grower Chevron and its lofty yield is hard to beat.

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