Energy stocks tend to be volatile largely due to capricious oil and gas prices. Investing in this sector thus requires a lot of patience and conviction. However, savvy long-term investors have reaped healthy returns by investing in the right stocks and holding tightly onto their investments.
To get a sense of the kind of returns you can generate, consider the long-term returns of top energy stocks: Chevron (CVX -0.08%), Valero Energy (VLO -0.54%), and Enbridge (ENB -0.20%). Since the beginning of 2000, these three stocks have generated total returns of 433%, 2,470%, and 1,600%, respectively, compared to the S&P 500 index's total return of 307%. However, all three stocks have underperformed the broader market in the past decade.
So, can these stocks generate market-leading total returns in the years to come? Likely yes. Let's see why.
In five years, West Texas Intermediate (WTI) crude oil prices averaged nearly $52 per barrel. Except for the steep fall last year, from which it has fully recovered, WTI oil prices weren't too volatile during this period.
Similarly, prior to the volatile period of 2006 to 2014, oil prices were relatively stable for a decade and a half.
It is thus fair to assume that average oil prices in the long term should remain in a range where at least top energy companies like Chevron can grow reasonably. Considering the beating that energy stocks have taken in recent years, several of them look attractive despite their rise since October of last year.
Chevron, in particular, is a top oil and gas stock with one of the strongest balance sheets among its peers. The company added net 832 million barrels of oil-equivalent proven reserves in 2020 while also divesting less strategic assets. Chevron has taken quick steps to reduce its operating expenses in response to the market environment. It is a dividend aristocrat and currently offers an alluring yield of 4.8%.
With a throughput capacity of 3.2 million barrels per day (bpd), Valero Energy is one of the world's largest independent refiners. A recovery in demand for gasoline should benefit refiners, including Valero. The U.S. Energy Administration expects gasoline consumption to rise to an average of 8.6 million bpd in 2021 from 8 million bpd last year. Moreover, it is expected to rise to 8.9 million bpd in 2022. Top refiner Valero Energy is among the best-placed refiners to gain from this recovery.
Moreover, Valero is positioning itself for the future with its renewable fuel operations. With a capacity of 290 million gallons per year, Valero is the world's second-largest renewable diesel producer. The refiner plans to expand its capacity to 1.2 billion gallons per year by 2023. Valero's renewable diesel operations have generated growing cash flow over the years. These position Valero well for the future when the demand for low-carbon fuels is expected to grow substantially.
With an attractive yield of nearly 5.5%, Valero Energy is a great stock to consider.
Canadian pipeline operator Enbridge has increased its dividend payments for 26 consecutive years. That's commendable considering that this period included the 2008 financial crisis, the 2014 commodity price rout, as well as the challenging market environment last year due to the pandemic. The company's resilient performance can be attributed to its diversified operations as well as its regulated gas distribution and transmission business. Its liquids pipelines are strategically located and are backed by long-term contracts generating steady income.
Not only has Enbridge grown handsomely over the years but it will likely continue to do so. That's because it expects to place CA$10 billion of projects into service in 2021. Its upcoming growth projects give Enbridge the confidence to be able to grow its distributable cash flow (DCF) by 5% to 7% through 2023. That should, in turn, help the company to grow its payouts as it expects to pay 60% to 70% of its DCF as dividends.
All in all, with a dividend yield of 6.6%, Enbridge is a top energy stock in which to invest a third of your $5,000.