The stock market doesn't go up in a straight line. There are often bumps along the road. However, those dips can often be great opportunties for investors to buy stocks they like at lower prices.
We asked some of our energy market contributors for their favorite stocks to buy on a dip. Here's why they think TotalEnergies (TTE 1.33%), NextEra Energy (NEE -0.21%), and Brookfield Renewable (BEP -1.25%) (BEPC -0.06%) always stand out as great buying opportunties when volatility strikes.
Buying for today and the future
Reuben Gregg Brewer (TotalEnergies): Sometimes I feel like a broken record, but TotalEnergies is my favorite international energy major and a name that is worth adding on weakness. There are two main reasons for this.
The biggest for income investors like me is the French company's dividend. Not only is the yield a heady 7% (the highest in its peer group), but management made a specific point of highlighting the importance of dividends during the darkest days in 2020. Better yet, it said specifically that it would hold the line on the payment as long as oil averaged around $40 per barrel. No other oil major was willing to make that kind of commitment; rivals BP and Shell actually cut their dividends.
The second notable reason to keep buying this energy giant is that it has laid out a specific plan to adjust with the world around it by expanding further into the clean energy space. To be clear, I believe oil and natural gas will be vitally important fuels for decades to come. However, I recognize that clean energy is an increasingly important piece of the global energy pie. The fact that TotalEnergies is addressing this transition, using its legacy business as a cash cow to fund the overhaul, while also protecting the dividend, is -- so far -- unique. The BP and Shell dividend cuts came at about the time they announced clean energy transition plans and Exxon Mobil and Chevron are basically dragging their feet on the clean energy front.
In other words, for dividend lovers, TotalEnergies looks like a good way to invest in the energy world as it exists today and as it changes for tomorrow.
The best utility in the business
Matt DiLallo (NextEra Energy): NextEra Energy has done a phenomenal job creating shareholder value over the years. The utility has grown its adjusted earnings per share at an 8.7% compound annual rate since 2005. That's helped support 9.6% compound annual dividend growth during that timeframe. Those two factors have helped power an astounding 700% total shareholder return over the last 10 years, crushing the S&P 500's 267% total return in that period.
NextEra Energy expects to continue growing at a healthy rate in the coming years. It foresees its adjusted earnings growing at or above the high end of its 6% to 8% annual target range through 2023. Meanwhile, it expects dividend growth of around 10% per share through at least 2022. Powering that view is the company's growing dominance in the renewable energy market.
The only problem is that NextEra Energy trades at a premium valuation. Investors are willing to pay up due to the company's historical success and vision of a bright future. The company currently sells for a forward price-to-earnings ratio of more than 34 times. For comparison, other large utilities trade at around 20 times their forward PE. As a result, NextEra has a relatively low dividend yield for the utility sector at 1.8%.
That currently pricy valuation makes NextEra an ideal energy stock to buy on a dip. That would allow investors the chance to buy this top-tier utility at a better price.
A compelling combination of value and growth
Neha Chamaria (Brookfield Renewable): I really like my colleague Matt DiLallo's stock pick, NextEra Energy, but there's another great pure-play renewable energy stock you'd want to buy on every dip, and that's Brookfield Renewable Partners.
The stock has been under a bit of pressure this year, but Brookfield Renewable has been a stunning multibagger over the years. Of course, past performance doesn't guarantee future results, but Brookfield Renewable shares didn't rise on a fluke. The company grew its funds from operations per share at a compound annual growth rate of more than 10% between 2010 and 2020, increased its dividend every year since, and yields a decent 2.9% currently.
So what are the chances it'll continue to grow just as fast? High, I'd say, given that Brookfield Renewable projects its FFO per share to grow by as much as 20% on the higher side through 2025, including up to 11% organically, backed by a swelling pipeline of projects in solar, wind, and hydropower. Management is also aiming for 5%-9% annual dividend growth, which effectively means you'd be buying a value and a dividend growth stock in a high-potential industry every time you buy Brookfield Renewable shares. It's not easy to find stocks with such compelling traits, which is exactly what makes Brookfield Renewable one of the best stocks you could keep adding to for the long term.