If there is one theme in the energy sector that has received a lot of attention in recent years, it is the global transition from dirty carbon fuels to cleaner alternatives. It’s a very real phenomenon, even if it’s happening much more slowly than clean energy advocates would like. And that creates an interesting investment opportunity that even passive income investors who like high-yield dividend stocks can jump on.
This is why Enbridge(NYSE: ENB), Total Energies(NYSE: TTE)And Brookfield Renewable(NYSE:BEP)(NYSE: BEPC) are three interesting stocks to explore right now given this increased interest, especially if you want to build a passive income stream in the energy sector that will last decades into the future.
About 50% of Enbridge’s earnings before interest, taxes, depreciation, and amortization (EBITDA) come from oil pipelines. Another 25% comes from natural gas pipelines. At the start of 2023, these two figures stood at 57% and 28%, which is a significant change because it was driven by the Canadian midstream giant’s acquisition of natural gas companies. The utilities division grew from 12% of EBITDA to 22%, with renewable energy exposure of 3% largely unchanged.
One of Enbridge’s big goals is to provide the world with the energy it needs as the world’s energy needs change. Natural gas, which burns cleaner than coal or oil, acts as a transition fuel for the shift to clean energy. And so the company wants to expand its exposure to natural gas. But don’t forget that 3% of EBITDA is in the renewable energy sector. Management is also looking at the steps it needs to take to expand beyond natural gas, although it appears to believe it has plenty of time to build this business given the likelihood of an energy transition that will last several decades.
Meanwhile, Enbridge has an investment grade-rated balance sheet. It has increased its dividend, in Canadian dollars, annually for 30 consecutive years. And the distributable cash flow payout ratio is right in line with the target payout range of 60% to 70%. The yield is a lofty 6.4%.
The interesting thing about Enbridge is that it operates in the middle segment of the broader energy sector. Midstream assets are largely fee-based and provide reliable cash flows. Some investors may prefer a bit more exposure to commodities, and that’s where TotalEnergies comes in. This French company is one of the largest integrated energy giants in the world, with assets spanning from oil and natural gas production to the chemical and refining side. of the company. While exposure to the entire energy sector helps mitigate the industry’s inherent volatility, TotalEnergies still exposes investors to oil price fluctuations. Oil prices have been weak lately, causing the company’s shares to fall and its yield to rise to 5.9%.
What sets TotalEnergies apart from its closest peers is that it has aggressively entered the clean energy and electricity space as it looks to adapt to the world around it. Currently, the integrated energy division (where clean energy lives) represented roughly 10% of segment profit through the first nine months of 2024. And it is making this transition without resorting to a dividend cut, as European peers say. BP And Shell did when they announced similar plans. ExxonMobil And Chevron not nearly as heavily invested in the energy transition.
All told, TotalEnergies is using its oil and gas profits to build a company that may one day replace oil and gas. If you believe the long-term future is green, TotalEnergies is probably the integrated energy giant you should own.
Both Enbridge and TotalEnergies bridge the gap between today’s energy needs and tomorrow’s. Brookfield Renewable, with a yield of up to 5.9%, is a high-yield way to focus on clean energy. And given that growth is likely to continue for decades, there’s no particular reason to believe Brookfield Renewable can’t deliver decades of passive income.
What’s unique here, though, is that Brookfield Renewable is run by Brookfield Asset Management(NYSE: BAM)a highly respected Canadian asset manager with a long history of investing in the global infrastructure sector. In short, Brookfield Renewable is a way to invest alongside Brookfield Asset Management. That’s fine, but it changes the equation in some ways because Brookfield Renewable is very aggressive in the way it manages its asset portfolio. Typically, the company buys clean energy assets when they appear cheap, works to improve operations to increase the value of the assets it buys, and then sells assets when it can get a good price.
While there are some assets in the portfolio that will likely never be sold, understand that Brookfield Renewable is run more like an asset manager than an electric utility. This fact also helps explain the two different share classes, with a partnership class and a corporate share class both representing the same entity. However, demand for the corporate share class, which is more popular among larger investors (which is in fact the reason it was created, as it allowed Brookfield to tap a broader investor pool for growth capital), has pushed its returns to a lower yield of 4 .7 lies. %. But all in all, if you want to focus on clean energy, Brookfield Renewable’s globally diversified portfolio and high yield should put it high on your list of options.
Oil and natural gas will likely be needed for decades to come, so you can hang on to companies that ignore the clean energy transition and are probably fine. However, Brookfield Renewable appears to be jumping into the clean energy pool with both feet. The modest and growing clean energy exposure that Enbridge and TotalEnergies offer, meanwhile, will be solid choices for those who prefer to dip a toe in before they leap. All three allow you to hedge your energy bets while still collecting high returns for years to come.
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Reuben Gregg Brewer holds positions at Brookfield Renewable Partners, Enbridge and TotalEnergies. The Motley Fool holds positions in and recommends Brookfield Asset Management, Chevron and Enbridge. The Motley Fool recommends BP, Brookfield Renewable and Brookfield Renewable Partners. The Motley Fool has a disclosure policy.
Do you want passive income for decades? 3 High Yield Energy Stocks to Buy Right Now was originally published by The Motley Fool
