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A Bull Market Could Be Here: 3 Dividend Stocks to Buy Before the Next Rally

Motley Fool - Sun Sep 17, 7:30AM CDT

Although many energy companies are looking to transition away from oil and into more green energy, the demand for oil remains strong globally. Even with the industry's notorious boom and bust cycles, the steady demand for both traditional and renewable energy sources all but ensures a resilient long-term market.

For investors seeking reliable investment income, energy companies are a good choice because they tend have shareholder-friendly dividend policies. Here are three companies to consider adding to your portfolio before the next rally.

1. Devon Energy

Devon Energy(NYSE: DVN) is an energy company specializing in oil and natural gas exploration. The company's stock hasn't performed the best this year, down over 11%, but a potential rise in oil prices could be the catalyst that its bottom line and stock price need.

OPEC+ -- which is the Organization of the Petroleum Exporting Countries and its allies -- recently announced it would continue reducing its oil output in an attempt to raise oil prices. Assuming it works, Devon Energy should see a revenue and profit boost. It'd be timely, too, as its second-quarter 2023 revenue and profit were down over 41% and 64%, respectively.

A revenue and profit increase is always music to investors' ears, especially to Devon Energy investors, because of the company's dividend structure. Devon has a base dividend plus a variable amount it adds to it based on its excess free cash flow (up to 50%). Luckily for investors, the dividend is the company's "top funding priority."

Devon Energy is a shareholder-friendly company with a lot of upside if oil prices rebound. That makes it an appealing option for investors looking for income and potential growth opportunities.

2. Enbridge

Enbridge(NYSE: ENB) is a Canadian energy company focusing on natural gas and crude oil transportation. With over 17,800 miles of pipeline in North America, it's one of the largest pipeline operators in the world, and its business is about to expand with the $14 billion acquisition of three natural gas utilities from Dominion Energy.

That news makes Enbridge North America's largest natural gas utility franchise, but it seemingly wasn't enough to please investors. The stock price dropped 6% a day after the news was announced.

Despite the recent stock price woes, Enbridge remains a good dividend option for investors. Its quarterly dividend is currently 0.8875 Canadian dollars, which works out to around $0.66 per share. Its trailing-12-month yield is over 10%, making it one of the more lucrative ones you can find.

A high yield by itself isn't always a good reason to invest, but Enbridge has the balance sheet and cash flow to ensure the dividend continues (with annual increases) and provides good shareholder value. Even with a lucrative dividend, Enbridge only pays 60% to 70% of its cash flow, leaving plenty of capital available to put toward continued growth.

Enbridge is hovering near its lowest point in two years, giving investors a chance to get into the stock at a good value.

3. Chevron

Chevron(NYSE: CVX) is the largest and most notable company on the list, with a market capitalization of over $300 billion (around 3 times Devon Energy and Enbridge combined). In the oil business, operations are broken down into three segments: upstream, midstream, and downstream. Chevron operates in all three.

Operating across the oil business spectrum helps Chevron simultaneously lower risks and take advantage of opportunities, as different segments are sensitive to market conditions. For example, upstream operations perform better when oil prices are high, while downstream operations tend to be more profitable when oil prices are low.

Financially, Chevron is in a great position. The company's earnings are considerably more than its dividend payout, and it operates with much less debt than competitors like ExxonMobil, BP, and Shell. Relatively low debt gives Chevron more flexibility to navigate ever-changing market conditions because it's not weighed down by large interest payments (especially in today's environment).

CVX Total Long Term Debt (Annual) Chart

CVX Total Long Term Debt (Annual) data by YCharts

Chevron's current quarterly dividend is $1.51, with a yield of around 3.7%. The company has increased it for 37 consecutive years, and there's no reason to believe that'll change anytime in the foreseeable future. Long-term investors should feel comfortable buying and holding on to the stock for the long haul.

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Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends BP and Enbridge. The Motley Fool recommends Chevron and Dominion Energy. The Motley Fool has a disclosure policy.

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