If you’re considering investing in the energy sector, it’s hard to avoid concerns surrounding the shift from carbon fuels to cleaner alternatives such as solar and wind energy. You do have to take into account the transition that is taking place, but the important thing is that it is a slow-moving change.
That’s why energy companies love it Enbridge (NYSE: ENB) And Total Energies (NYSE: TTE)that still have their feet firmly planted in the world of carbon energy are two great dividend stocks to buy today.
The shift to clean energy is real
Clean energy is not a fad; it is a very real threat to older, dirtier energy sources. For example, coal consumption in the United States has fallen sharply as the use of cleaner natural gas has increased. Solar and wind energy are also spreading rapidly. However, solar and wind energy are building on a very small base, so growth rates are high, but there is still room to increase as a percentage of the total energy pie.
This leaves dividend investors with a conundrum. Energy companies that produce oil and natural gas still generate enormous cash flows and will likely continue to do so for decades. But the long-term future will likely include significant amounts of clean energy. Fortunately, you don’t have to buy oil or clean energy stocks; There are options that allow you to take advantage of the cash flow created by oil and natural gas today, while still gaining exposure to clean energy.
Enbridge is a slow and steady turtle
Enbridge is one of the largest midstream companies in North America. It owns a portfolio of pipelines, storage and transportation assets that are difficult, if not impossible, to replace. It charges fees for the use of this vital energy infrastructure, ensuring it has reliable cash flows throughout the energy cycle. Here’s how it supports its massive 7.7% dividend yield. In addition, the dividend has been increased annually for 29 years in a row. The company’s oil and natural gas pipelines represent approximately 85% of its earnings before interest, taxes, depreciation, and amortization (EBITDA).
The rest of the activities consist of a natural gas company and investments in clean energy, such as offshore wind farms in Europe. Natural gas is considered a transition fuel and burns cleaner than coal or oil. Enbridge is in the process of acquiring three additional natural gas operations, which will reduce the pipeline segment’s contribution to EBITDA to 75%. And the country continues to invest in clean energy, which accounts for only about 3% of EBITDA but should become increasingly important over time.
Enbridge tries to evolve with the world around it so that it remains an important supplier of energy, in whatever form it takes. That should be music to the ears of long-term investors looking for high-yield stocks. The only caveat is that the yield here will likely make up the lion’s share of your return. But if you’re trying to maximize the income your portfolio generates, that probably won’t be a problem for you.
TotalEnergies is pushing hard for a new space
If you want more direct exposure to the ups and downs of oil prices, which are currently rising, you might want to consider TotalEnergies. Because the country produces oil and natural gas, it will benefit from rising energy prices (it will also bear the brunt of falling prices). But it is an integrated energy giant, meaning it has a globally diversified business spanning upstream (manufacturing), midstream (pipelines) and downstream (chemicals and refining). This diversification helps smooth out the peaks and valleys in the highly cyclical energy sector.
What sets TotalEnergies apart from its peers is that it has made a big commitment to investing in clean energy and electricity. These are increasingly important areas of the wider energy sector as the world moves in a greener direction. Just like Enbridge, TotalEnergies wants to adapt to the times. And there is one more important fact: when peers BP (NYSE:BP) And Shell (NYSE: SHEL) When they announced similar strategic shifts around the turn of the century, they cut their dividends. TotalEnergies supported the payout and emphasized that it understood how important the dividend was to shareholders.
The company’s clean energy and electricity businesses are still modest in size, accounting for approximately 7% of the segment’s total net operating income. But TotalEnergies is moving responsibly by using the cash flows from its carbon energy business to both build that investment and pay for its reliable 4.4% dividend yield. That’s a good balance for those looking for long-term exposure to energy commodities and hedge against the clean energy transition.
Two ways to collect large energy yields for years to come
Investing is always a balancing act between risk and return. When it comes to the energy sector, the biggest long-term threat is the continued, albeit slow, move towards cleaner energy sources. But you can have the best of both worlds when you invest in Enbridge and TotalEnergies. The two companies generate reliable cash flows from their carbon-heavy businesses, supporting their dividends and investments in the future, which increasingly include clean energy.
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Reuben Gregg Brewer has positions in Enbridge and TotalEnergies. The Motley Fool has positions in and recommends BP and Enbridge. The Motley Fool has a disclosure policy.
Do you want passive income for decades? 2 Energy Stocks to Buy Now and Hold Forever was originally published by The Motley Fool
