Don't Chase Yield: Why These Two US Energy Stocks Deserve Your Attention

Key Points

• Energy Transfer boasts an impressive 7.9% yield, but high yield doesn’t always mean safety
• Finding the right balance between income and reliability is crucial for long-term dividend investors
• Enterprise Products Partners and Enbridge offer both solid returns and proven track records

The Energy Sector: Understanding Risk Beyond Price Volatility

The modern economy depends on energy, making it an essential portfolio component for most investors. Yet the energy sector is notoriously volatile—oil and natural gas price swings can wreak havoc on returns.

But there’s a critical distinction within the sector that many investors overlook. The industry splits into three segments: upstream (oil and gas production), downstream (refining into usable products), and midstream (the connective infrastructure).

The upstream and downstream operations are heavily commodity-dependent, meaning they suffer when energy prices plummet. The midstream business, however, operates differently—it’s essentially a toll-collecting mechanism. Companies earn revenue based on volume flowing through pipelines and infrastructure, not commodity prices themselves. This structural advantage means midstream firms maintain stable cash flows even during energy market downturns.

This makes the midstream an attractive haven for conservative dividend investors seeking energy exposure. Yet not all midstream players are created equal.

The Yield Trap: Why Higher Returns Aren’t Always Better

Energy Transfer presents itself as the obvious choice to uninformed yield-chasers. At 7.9%, its distribution far exceeds the 6.7% offered by Enterprise Products Partners or the 5.7% from Enbridge.

However, history tells a different story. Energy Transfer halved its distribution in 2020—a decision made during pandemic uncertainty that solidified its balance sheet but signaled potential fragility. That precedent should concern income-focused investors.

By contrast, Enterprise and Enbridge each increased their shareholder distributions in 2020:

• Enterprise Products Partners has now delivered 27 consecutive years of distribution increases
• Enbridge boasts 30 years of consecutive increases

For buy-and-hold dividend investors, this proven consistency outweighs the yield premium you’re sacrificing.

Why Enterprise and Enbridge Stand Out

Enterprise’s Strategic Positioning

Enterprise has strategically shifted toward natural gas, positioning itself for the energy transition. Natural gas serves as the bridge fuel toward cleaner alternatives. The company maintains investment-grade credit ratings and generates distributable cash flow that covers its distribution 1.7x over—a significant safety margin for conservative investors.

Enbridge’s Diversification Edge

Enbridge operates across multiple segments: oil pipelines, natural gas pipelines, regulated utilities, and clean energy investments. This diversification provides dual benefits—the regulated utilities offer predictable growth, while clean energy exposure demonstrates real alignment with the world’s energy evolution. For ultra-conservative investors, this portfolio breadth may make Enbridge the superior choice.

The Bottom Line for US Energy Investors

Focusing solely on yield can lead you astray in energy investing. Energy Transfer’s distribution cut history demonstrates why income investors must look deeper than headline numbers.

The better path for dividend investors lies in identifying companies that combine reasonable yields with operational reliability. Enterprise Products Partners suits investors prioritizing energy sector exposure with stability. Enbridge appeals to those seeking energy participation with meaningful clean energy diversification.

Lower yield doesn’t mean lower total returns—consistency and reliability often deliver superior long-term wealth creation.