Oil Stocks Are Spiking on the News That U.S.-Iran Peace Talks Have Crumbled. Here's What Investors Need to Know.

The geopolitical conflict in the Middle East has left the world short of oil and natural gas. These are vital commodities, and a shortage drives prices higher. The most recent breakdown in peace talks has left investors worried and pushed oil prices up again.

However, as events in the conflict have unfolded over the last few months, it is just as reasonable to expect good news to push oil prices lower. Energy industry executives are warning that energy prices aren't reflecting industry fundamentals, suggesting higher prices are possible. But right now, it is clear that emotions driven by news flow are what are moving energy investments. With so much uncertainty, caution is probably warranted.

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The safest ways to play in the oil patch

The volatile swings in energy prices related to the geopolitical conflict in the Middle East may be eye-opening to some investors. However, they aren't actually unusual in the energy sector. It has always been a highly volatile segment of the market. That said, oil and natural gas are vital to the world's normal functioning, so most investors should have some exposure.

You could lean into oil price volatility with a pure-play driller like Devon Energy (NYSE:DVN). It is well-positioned to benefit from high energy prices because its production is U.S.-based, so it isn't directly affected by the Middle East conflict. However, when energy prices eventually fall, as they always have historically after a spike, Devon's business will be hard hit. Most investors will be better off with diversified energy stocks like ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX).

Exxon and Chevron have exposure to the entire energy value chain, including production, transportation, and refining. This helps to soften the peaks and valleys inherent in the volatile sector. Moreover, they both have rock-solid balance sheets, with debt-to-equity ratios of roughly 0.2x and 0.25x, respectively. They have the lowest leverage among their integrated peers. The combination of diversification and financial strength has allowed each of these global energy giants to increase their dividends annually for decades.

So when oil prices eventually turn lower, you can watch your dividend checks instead of stock prices. Exxon's dividend yield is 2.7%, and Chevron's is 3.8%.

You could also sidestep oil prices if you wanted

The interesting thing about the energy sector is that there is a middleman in the mix that isn't as impacted by energy prices. Businesses like Enterprise Products Partners (NYSE:EPD) and Enbridge (NYSE:ENB) charge fees for transporting energy. The volume that is moving through their energy infrastructure systems is more important than the price of the energy being moved. Since energy is so important to the world economy, volumes tend to remain high regardless of energy prices and even tend to be strong during recessions.

That's how Enterprise and Enbridge have also managed to increase their dividends annually for decades. That said, the reliable cash flows these two midstream businesses generate support much more attractive dividend yields. Enterprise's distribution yield is 5.8%, while Enbridge's dividend yield is 5%.

The one problem with these two pipeline operators is that they are boring. Their yields will make up a large portion of your total return over time, with slow business growth fairly normal for the sector. However, if you are a dividend investor, that probably won't bother you. And you'll have energy exposure without taking on material commodity risk.

Things could get worse before they get better

The CEOs of Exxon and Chevron are both warning that oil prices aren't reflecting actual market conditions in the energy sector. While that suggests oil prices could rise from here, it also highlights that emotions are driving the market right now, not fundamentals. That should worry long-term investors, and the best way to deal with it is to err on the side of caution with diversified industry giants like Exxon and Chevron, or to sidestep commodity price risk with investments like Enterprise and Enbridge.

Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Chevron and Enbridge. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.