Big Oil vs. Midstream: Which Side of the Barrel Pays Better Right Now?

Energy stocks are a go-to source for many investors seeking dividend income. The trailing 12-month yield of energy stocks in the S&P 500 is currently over 4%, more than three times higher than the index's overall average of around 1%. However, yields vary within the energy sector. Right now, midstream companies pay better than big oil.

Here's a look at the differing yields and growth profiles of each side of the barrel.

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Big oil can pay big dividends

ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) are two of the world's largest oil companies. They're also leading dividend stocks. Exxon has increased its payment for 43 straight years (fewer than 5% of S&P 500 companies have achieved this), while Chevron has 39 years of annual dividend increases under its belt. Both oil stocks currently offer above-average dividend yields: Chevron's is around 3.5%, while ExxonMobil's is over 2.5%.

The oil giants are in a strong position to continue growing their dividends. Exxon's 2030 plan would see it deliver 13% earnings growth and double-digit cash flow growth, with even higher per-share growth driven by its share repurchase program, assuming constant margins and pricing relative to 2024. Meanwhile, Chevron expects to deliver more than 10% annual free cash flow growth through 2030, assuming oil averages $70 a barrel. Both companies are working to enhance their strategies. Exxon is bidding on Shell's U.S. chemicals assets while Chevron is looking to expand into Iraq. They should have plenty of fuel to continue increasing their high-yielding dividends.

The midstream side of the barrel can pay even better

Most energy midstream companies currently offer even higher yields than those big oil giants. For example, Enterprise Products Partners (NYSE: EPD) currently yields around 5.8%, while Enbridge (NYSE: ENB) yields slightly less at 5.5%. Others in the sector have lower yields, with Williams and Kinder Morgan closer to Exxon and Chevron's range at 2.8% and 3.7%, respectively. Tax complexity can contribute to the higher yields offered by some midstream companies, as Enterprise is a master limited partnership (MLP), while Enbridge is a Canadian corporation.

Many midstream companies have strong dividend growth records. Enbridge has increased its dividend for 31 straight years (in Canadian dollars), while Enterprise has raised its distribution for 28 consecutive years. Both companies should have the fuel to continue growing their payouts. Enterprise currently has $6.5 billion of major capital projects under construction that should enter service through early 2029. Meanwhile, Enbridge has a massive 41 billion Canadian dollars ($29.6 billion) in secured projects in its backlog that it expects to finish through the early 2030s. It recently enhanced its strategy by purchasing Salt Creek Midstream's crude gathering business for $600 million and securing CA$2.7 billion ($1.4 billion) in funding from private equity giants KKR and Apollo to support Westcoast pipeline expansions in Canada.

Verdict: Midstream wins if tax complexity isn't a concern

The energy midstream sector offers higher current yields than big oil, especially among MLPs and Canadian companies. So, if income is your sole aim, and you're fine with dealing with the tax complexities (MLPs send Schedule K-1 Federal tax forms, while there's a 15% withholding tax on Canadian dividends paid on shares held in a regular brokerage account), they're the better side of the barrel to buy right now.

Matt DiLallo has positions in Chevron, Enbridge, Enterprise Products Partners, KKR, and Kinder Morgan. The Motley Fool has positions in and recommends Chevron, Enbridge, KKR, and Kinder Morgan. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.