Pandemic-hit 2020 was a terrible time for energy stocks, with many cutting dividends and some even going bankrupt. Oil prices have strengthened after hitting historic lows, but the sector isn't out of the woods just yet. So income investors looking at the energy space for bargains need to also consider dividend safety. On that score, France's Total (TTE 0.36%), Canada's Enbridge (ENB 0.95%), and Enterprise Products Partners (EPD 1.07%) should all be high on your income wish list.
1. The oil major
Of the oil majors, Total is the only one that really put a line in the sand when it came to its dividend in 2020. Management said, multiple times, that the dividend was a key issue and that it would maintain it as long as oil prices averaged around the $40 per-barrel level. Oil is comfortably above that point today, so Total's dividend, and 6.7% dividend yield, appear very safe. Note that its major European peers cut dividends last year as they announced plans to start shifting their businesses toward clean energy.
That is the bigger issue here; Total is supporting the dividend even as it works to adjust its business along with the broader energy sector. It is, basically, using its oil-focused operations as a cash cow to pay for the transition to a lower carbon future. And while U.S. integrated major peers also held their dividends in 2020, they aren't making the same effort to move toward cleaner alternatives. In this regard, Total now appears to be one of the best ways to generate income from oil while ensuring that you don't get burned by the clean energy zeitgeist.
2. A pipeline shifter
The story at Enbridge is very similar, though this North American pipeline giant continues to increase its dividend. In fact, with the hike it has already announced for 2021, its annual streak of dividend increases is now up to 26 consecutive years (that puts it in Dividend Aristocrat territory). The yield, meanwhile, is a robust 7.1% and should remain comfortably within its targeted range of 60% to 70% of distributable cash flow (DCF). In fact, Enbridge believes it can invest between $3 billion and $4 billion a year for the foreseeable future, pushing DCF higher by around 5% to 7% annually, with dividends following close behind.
The interesting thing here is where the cash is going. Enbridge owns oil pipelines, natural gas pipelines, a natural gas distribution business, and a portfolio of clean energy projects. Like Total, it is using the oil business to expand into alternatives that it believes have longer-term growth potential. In this case, that means natural gas (which management believes is a transition fuel) and renewable power. This might actually be the most attractive name on the list, given its yield, growth plans, industry position, and clean energy credentials.
3. Old-school, but reliable
Master limited partnership Enterprise Products Partners rounds out the list, but it doesn't have the same renewable power bonafides as Total and Enbridge. However, it is one of the largest midstream players in North America, owning a portfolio of vital infrastructure assets that would be impossible to replace. That should ensure its business remains strong for years to come. The question is how strong.
In 2020, which was a terrible year for the energy sector, Enterprise's DCF covered its distribution by roughly 1.6 times. That's a big cushion and leaves plenty of room for adversity before the distribution is at risk. In fact, the partnership even increased its dividend in the first quarter, extending its over 20-year streak of annual hikes by yet another year. Meanwhile, with material operations in the natural gas and energy processing niches, Enterprise isn't poorly positioned for the future, it just doesn't have a major renewable power component. But with a well-covered 8% yield, investors may not mind.
No company is perfect
When you sum it all up, Total, Enbridge, and Enterprise are all offering attractive yields backed by solid businesses. Not a single one of these income investments is perfect, but then every investment has some warts. In the energy sector, however, they look like they offer a good combination of yield and safety. If you take the time for a deep dive, you might find that one (or more) ends up in your portfolio today.