The modern world doesn’t exist without energy. Although there is an effort to shift toward cleaner alternatives like solar and wind, it is likely to take decades for this transition to have a material impact on the energy sector. With that backdrop, here are three energy stocks that dividend investors should be looking at today even as energy prices remain elevated.
1. For conservative types
One of the key traits of the energy sector is commodity price volatility. However, you can sidestep much of that risk with a midstream name like Enbridge (ENB -2.10%). The company owns a massive collection of oil and natural gas pipelines, a natural gas utility business, and a small but growing collection of clean energy investments. Virtually all of the company’s business is backed by usage fees or long-term contracts. Essentially, the price of oil and gas aren’t really that big of an issue for Enbridge’s business, demand is far more important.
Enbridge currently offers a generous dividend yield of around 6.3%. The dividend has been increased annually for over 25 consecutive years, making the company a Dividend Aristocrat. And it expects to be able to grow distributable cash flow by 5% to 7% a year on average through 2024. That’s backed by around 10 billion Canadian dollars in capital spending plans. The dividend should grow along with distributable cash flow. As for dividend safety, Enbridge expects to generate CA$2 billion more in cash than it needs for the next few years, which opens up opportunities for more growth and provides a cushion for the dividend.
2. Solid as a rock
If you’d rather own an investment that’s more focused on the energy markets, perhaps to take advantage of oil and gas price gyrations, consider Chevron (CVX -2.60%). It is one of the largest integrated energy companies on the planet, with a business that spans from the oil pump to the gas pump. However, oil and natural gas prices are still the driving force behind the top and bottom lines. Right now Chevron is doing very well, with second-quarter earnings of $5.95 per share up from just $1.60 in the same quarter of 2021, thanks to elevated energy prices.
There are other energy stocks with similar results, but what sets Chevron apart, aside from its size and diversification, is its financial strength. You can start to see that in its impressive three-decade-plus streak of annual dividend hikes. That’s notable when you consider how cyclical the energy sector is, since it takes a financially strong company to hike its dividend in the face of adversity.
When you examine the balance sheet, Chevron’s strength really starts to shine. Its 0.17 debt-to-equity ratio is lower than all of its closest peers, allowing management to take on debt to support the business through the inevitable lulls. If you want a direct oil play that can roll with the punches, Chevron is a name to consider. It currently yields around 3.5%.
3. The punt
The last company here is a bit different. TotalEnergies (TTE 0.20%) is a French integrated energy giant that has a business very similar to that of Chevron. It doesn’t have as impressive a dividend history, but it did stand by its dividend during the pandemic-driven oil downturn in 2020, unlike European peers BP and Shell. What sets TotalEnergies apart from Chevron is that it has laid out a fairly aggressive plan to invest in clean energy as it continues to grow its oil and gas business. Shell and BP laid out similar plans too, but they used the plans as an excuse for cutting their dividends. If you are looking for a reliable dividend payer, TotalEnergies comes out ahead.
The stock yields roughly 5.5%, which is toward the high end of its closest peers. When you combine that with the company’s clean energy investment goals (it hopes to triple the size of this business by 2030), well, you come up with the middle of the road option in the energy sector. Yes, TotalEnergies will benefit from rising oil and gas prices. And it will benefit as the world shifts toward cleaner alternatives, an area on which Chevron isn’t nearly as focused. It likely won’t be the best performer in either space, but it provides a way to invest in both without having to own multiple stocks. For investors who prefer to keep things simple, that’s a good trade-off.
Three ways to play energy
Dividend investors should always be looking for safer investments, since risky ones can be a threat to your income stream. This is particularly important in the highly cyclical energy sector. Enbridge avoids commodity risk. Chevron has a rock-solid balance sheet. And TotalEnergies is hedging its oil and gas bets with clean energy investments. All offer reliable and generous dividends.
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