You love dividend stocks and are always on the hunt for compelling payouts, especially in red-hot sectors. But if a sector's on fire, not all dividend stocks in it are necessarily worth your money. Think energy.
Energy stocks have been on a dream run in recent months, but several companies are still cautious about returning money to shareholders.
Yet some energy stocks didn't just maintain a dividend in 2020, but also grew it, and they look primed to reward investors with regular, stable, and even higher dividends. These are exactly the kind of energy dividend stocks you want to check out, like the three below, which offer some of the sector's safest payouts today.
Proven dividends you can bank on
At 7%, Enterprise Products Partners (EPD 2.44%) doesn't just offer one of the highest yields in the oil and gas sector, but also one of the safest. The biggest testament to its stability, perhaps, was 2020, when many dividend-paying energy companies foundered, and suspended or cut dividends as the pandemic hit.
Enterprise Products Partners had a tough 2020, too, as oil prices crashed, but it still increased its dividend (even if by a tiny 1%) and ended the year with a comfortable distribution-coverage ratio of 1.6 times. In other words, the company generated enough cash flows to cover its dividend 1.6 times even in a pandemic year. That was its 22nd consecutive annual dividend increase, and those payouts have grown at a compound annual rate (CAGR) of 7% over the 22-year period.
Image source: Getty Images.
It's not hard to see why Enterprise Products Partners can continue to raise dividends in the years to come. It owns one of the largest pipeline networks in the U.S., handling natural gas, crude, and petrochemical products like ethylene and propylene. It's the world's largest exporter of liquefied petroleum gas, and has a strong balance sheet. As a player in the midstream oil and gas sector, the company can generate pretty stable cash flows.
Right now, with its capital expenditures expected to taper in 2022, Enterprise could free up even more cash to back a larger dividend increase, making it a rock-solid oil dividend stock to own at all times.
This company has its eyes on growth, and dividends
If you really want to play the energy sector and are bullish about oil prices, Chevron (CVX 3.88%) -- one of only two Dividend Aristocrats in the sector -- should be your go-to stock.
Chevron's credibility as a dividend stock lies in its track record of its payout: It has increased it every year for 34 consecutive years, at a CAGR of 7% since 2005. Management has time and again stressed how maintaining and growing its dividend remains a "top financial priority," and that didn't change even during the peak of the pandemic. This chart shows what a significant contributor Chevron's dividend growth has been to the stock's total returns in recent decades.
CVX data by YCharts.
Of course, a company must have the financial fortitude to meet its priorities -- and Chevron doesn't disappoint. It has a strong balance sheet, which is also why it could promptly take advantage of the oil market crash last year and buy out Noble Energy for $5 billion to expand its footprint in the Permian Basin and DJ Basin. Notably, Chevron added debt worth nearly $8 billion after the acquisition, but its debt-to-equity ratio of 0.34 is still among the lowest in the industry.
The company is reportedly eyeing more acquisitions even as it plans to spend $14 billion on exploration and production this year, and another $14 billion to $16 billion between 2022 and 2025. In short, Chevron won't stop growing, and that's something income investors should love about this 4.9%-yielding oil and gas stock.
The only Dividend Aristocrat in an exponential-growth industry
No discussion on energy stocks is complete today without including renewable energy, and rightly so: It is indeed the future of energy, and even if renewable energy companies might never replace fossil fuels entirely, their growth potential is unquestionable.
And there's nothing like finding an established dividend-paying renewable energy play. I'm thinking about NextEra Energy (NEE 0.92%), with a 2% yield and the rare distinction of being a renewable energy stock that has achieved Dividend Aristocrat status.
Of course, what matters is whether its dividend can continue to grow and add to the stock's returns. The answer is a resounding yes for three reasons.
NEE data by YCharts.
First, NextEra owns the largest regulated electric utility in the U.S., Florida Power & Light, as well as the world's largest producer of wind and solar energy and a leading battery storage provider, NextEra Energy Resources. So while its utility business can generate steady, predictable cash flows, it can pump that cash into growth areas like renewable energy. It's a win-win.
Second, NextEra Energy Resources' renewables backlog as of March 31 was nearly 14 gigawatts (GW), and it sees additional potential growth of 14 GW through 2024.
And third, NextEra expects to grow its adjusted earnings per share by 6% to 8% through 2023 and its annual dividend by roughly 10% through at least 2022.
That pretty much sums up why NextEra Energy recently became one of my top five stocks to buy and hold forever -- and why you can safely bet on its dividend.
