The energy market is undergoing a major transition as the global economy slowly shifts to cleaner fuel sources. It will take decades to complete and trillions of dollars in investment. In the meantime, fossil fuels will play a vital role in keeping the global economy humming along.
Because of that, energy companies will continue to utilize their existing infrastructure, some of which the industry can eventually repurpose to transport and store cleaner alternatives. As a result, these assets should continue generating gobs of cash that infrastructure operators can use to pay lucrative dividends.
Playing the energy-transition long game
Canada's Enbridge is one of the largest energy-infrastructure companies in North America. While it makes most of its money transporting liquids like crude oil, it has been slowly transitioning to cleaner energy sources by investing heavily in natural gas and renewable energy infrastructure.
All these businesses generate lots of steady cash flow backed by long-term contracts and government-regulated rates. Enbridge uses about 60% of that money to pay a 7%-yielding dividend and reinvests the rest into expanding its operations.
Enbridge currently has billions of dollars of expansion projects underway, including new oil and gas pipelines and offshore wind farms in Europe. Those projects alone should support 5% to 7% earnings growth through at least 2023, giving Enbridge the fuel to keep growing its dividend. Meanwhile, it's well-positioned to continue shifting its business toward low-carbon opportunities in the future.
It can utilize much of its existing infrastructure to support renewable natural gas, hydrogen, and carbon capture and storage. Because of that, it should have plenty of fuel to keep paying dividends during the energy transition while remaining a major player in the market on the other side.
Focused on the bridge fuel, but positioned for its replacement
Kinder Morgan is a leading North American energy-infrastructure company. It operates the largest natural gas transportation network, making it an essential player in the energy transition because gas is a cleaner fuel that will help bridge the gap to emissions-free alternatives. Those assets generate steady cash flow, roughly half of which Kinder Morgan pays out via its 6.4%-yielding dividend. The company allocates the rest toward expanding its operations and enhancing its financial flexibility.
Kinder Morgan also believes it's well-positioned to move the fuels of the future. As the International Energy Agency points out, "existing gas infrastructure is a valuable asset with significant storage capacity that can be repurposed over time to deliver large volumes of biomethane or, with modifications, low-carbon hydrogen." Kinder Morgan can currently transport renewable natural gas and a 5% to 10% hydrogen blend with natural gas on its existing pipelines.
Given that hydrogen is one-third as energy dense as natural gas, it could require three times as much capacity to transport it, suggesting lots of long-term growth potential for Kinder Morgan. While investors wait for that to happen, they can sit back and collect the company's massive dividend.
Following a similar blueprint
Williams Companies operates a large-scale, irreplaceable natural gas infrastructure system. This network generates steady cash flow for Williams, giving it the funds to support its 6.9%-yielding dividend and invest in expansion projects. It currently produces enough money to cover both with room to spare, enhancing its financial flexibility.
Williams has a multibillion-dollar pipeline of natural-gas-related expansion projects under construction and in development. This backlog should give it the fuel to continue growing its footprint through the early part of the next decade, even as the global economy transitions away from fossil fuels.
Meanwhile, it sees a long investment horizon for capital spending geared toward reducing emissions, including utilizing solar to power its pipelines and leveraging its existing network to transport renewable natural gas and, potentially, hydrogen. That optionality makes it a great option for patient investors.
A long way to go
Energy transitions don't occur overnight. Because of that, pipelines will remain vital in helping transport fuel to the economy for decades to come, with the potential of eventually getting a second act by moving the fuels of the future. Because of that, pipeline companies like Enbridge, Kinder Morgan, and Williams Companies can be great income options for patient investors since they should continue paying attractive dividends throughout the transition process.