If you’re thinking about investing in the energy sector, it’s hard to avoid the concerns surrounding the transition from carbon-containing fuels to cleaner alternatives like solar and wind power. While you need to take into account the transition that is taking place, the important takeaway is that it is a slow change.
That’s why energy companies like it Enbridge (NYSE:ENB) And TotalEnergies (NYSE:TTE)that are still firmly entrenched in the world of carbon energy are two great dividend stocks to buy today.
The transition to clean energy is real
Clean energy is not a fad; It poses a very real threat to older, dirtier energy sources. For example, coal consumption in the United States has declined sharply as the use of cleaner natural gas has increased. Solar and wind power are also spreading rapidly. However, solar and wind energy are built on a very small base, so the growth rates are high, but their share of the overall energy pie still has room to increase.
This presents a bit of a conundrum for dividend investors. Energy companies that produce oil and natural gas still generate enormous cash flows and will likely continue to do so for decades to come. But in the long term there will likely be significant amounts of clean energy as well. Luckily, you don’t have to buy oil or clean energy stocks; There are options that allow you to benefit from the cash flow created today by oil and natural gas while still having access to clean energy.
Enbridge is a slow and stable turtle
Enbridge is one of the largest midstream companies in North America. The company has a portfolio of pipelines, storage and transportation assets that would be difficult – if not impossible – to replace. Fees are charged for the use of this vital energy infrastructure, ensuring reliable cash flows throughout the energy cycle. In doing so, it supports its huge 7.7% dividend yield. Additionally, the dividend has been increased annually for 29 consecutive years. The company’s oil and natural gas pipelines account for approximately 85% of its earnings before interest, taxes, depreciation and amortization (EBITDA).
The rest of the business consists of a natural gas supplier 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 purchasing three additional natural gas utilities, which will reduce the pipeline segment’s contribution to EBITDA to 75%. And it continues to invest in clean energy, which, while only about 3% of EBITDA, should continue to grow in importance over time.
Enbridge is trying to evolve with the world around it to remain a major energy supplier, whatever form it takes. That should be music to the ears of long-term investors looking for a high-yield stock. The only caveat is that the return here is likely to make up the lion’s share of your return. However, if you’re trying to maximize your portfolio’s returns, this probably won’t be a problem for you.
TotalEnergies is pushing hard into a new area
If you want to participate more directly in the ups and downs of currently rising oil prices, consider TotalEnergies. Because the country produces oil and natural gas, it will benefit from rising energy prices (but will also bear the brunt of falling prices). But it is an integrated energy giant, meaning the company has a globally diversified business spanning upstream (manufacturing), midstream (pipelines) and downstream (chemicals and refining). extends. This diversification helps mitigate the ups and downs in the highly cyclical energy sector.
What sets TotalEnergies apart from its competitors is that it is deeply committed to investing in clean energy and electricity. These are increasingly important areas of the overall energy sector as the world moves in a greener direction. Therefore, like Enbridge, TotalEnergies is striving to adapt to the times. And there is another important fact: with peers B.P (NYSE:BP) And sleeve (NYSE:SHEL) When companies announced similar strategic changes at the turn of the millennium, they cut their dividends. TotalEnergies supported the distribution and emphasized that it understands how important the dividend is for shareholders.
The company’s clean energy and electricity business is still modest in size, accounting for approximately 7% of the segment’s total net operating income. But TotalEnergies is evolving responsibly, using the cash flows from its carbon energy activities both to build that investment and to pay its reliable 4.4% dividend yield. This is a good balance for those seeking long-term exposure to energy commodities and hedging against the clean energy transition.
Two ways to achieve large energy yields for years to come
Investing is always a balancing act between risk and return. In the energy sector, the biggest long-term threat is the ongoing, albeit slow, transition to cleaner energy sources. But you can enjoy the best of both worlds when you invest in Enbridge and TotalEnergies. The two companies generate reliable cash flows from their carbon-intensive businesses, supporting their dividends and investments in the future, which increasingly include more clean energy.
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Reuben Gregg Brewer has held positions at Enbridge and TotalEnergies. The Motley Fool has positions in and recommends BP and Enbridge. The Motley Fool has a disclosure policy.
Do you want decades of passive income? “2 Energy Stocks to Buy Now and Hold Forever” was originally published by The Motley Fool