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Get Paid While You Wait: 3 Top Dividend Stocks in Energy

By Reuben Gregg Brewer – Sep 24, 2021 at 8:02AM

Key Points

  • Oil and natural gas are out of favor, but the industry isn't sitting still.
  • Enbridge and TotalEnergies are high-yield names with plans to clean up their businesses.
  • Shell has a lower yield, but is already proving that its low-carbon shift can support a growing dividend.

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These dividend-paying energy stocks are headed in the right direction and "cleaner" than they appear.

The energy sector is out of favor, at least partly because of the push to reduce the amount of carbon that humans generate. The thing is, shifting away from oil and natural gas is going to take decades, even under some of the most ambitious projections that currently exist. So, contrarian investors have plenty of time to invest in the sector -- and, if they pick the right energy names, their investments could end up shifting toward clean energy and paying them well all along the way. Here are three top dividend paying energy stocks to look at today as they start to change with the world around them.

1. The toll man

At its core, Canada's Enbridge (ENB 0.17%) is a pretty boring company, collecting fees for the use of the midstream assets it owns. That should be pretty desirable for income-oriented investors, because it avoids the inherent ups and downs from the commodity-driven side of the energy space.

Enbridge is one of the largest midstream companies in North America. Its yield is a hefty 6.7%, and the dividend has been increased for over 25 consecutive years, putting it in Dividend Aristocrat land. Add in an investment-grade balance sheet and even conservative investors should like what they see.

A person in front of wind turbines.

Image source: Getty Images.

But the most interesting thing here is probably the fact that Enbridge gets 3% of its EBITDA from renewable power assets. To be fair, 3% is a tiny number, but the company has a collection of offshore wind projects in the works that will increase the size of this business. That's just one piece of Enbridge's overall growth plan, but it means that the company sees the future and is adjusting now.

With decades to go before the midstream giant expects demand for oil and gas to become an issue, it has ample time to clean up its carbon footprint. In the meantime, you can collect fat dividends from the cash cow pipeline business as it adapts to a changing world.

2. Same direction, more volatility

France's TotalEnergies (TTE -2.19%) is similar, but different. Like Enbridge, this energy industry giant sees the clean energy writing on the wall, and is starting to adjust for the future. However, it is far more exposed to commodity prices given that it is an integrated oil and natural gas company. That may be more than some investors want to take on, given the inherent volatility in this end of the energy sector. But upstream heavy TotalEnergies not only managed to muddle through the 2020 energy downturn without a dividend cut, but it was the only oil major to expressly state that it would support its dividend as long as oil averaged around $40 per barrel. None of its peers made such a commitment. TotalEnergies obviously knows how important dividends are to its shareholders. The yield today is roughly 7%, the highest in the integrated major space.

The caveat is that TotalEnergies' dividend isn't likely to grow from here, so that 7% yield is basically all you should expect on the dividend front. The rest of its cash is likely to go toward debt reduction efforts and investment for the future. However, that's the really interesting thing, since the company's spending plans include a huge helping of clean energy investment. In fact, it wants to triple the size of this business by 2030 (compared to 2019 levels).

It's important to note that TotalEnergies is not a new player in the clean energy space -- it has been investing in the sector for years. So there's really no reason to doubt its ability to achieve its goals. If you like big yields and are willing to invest in an out of favor name, this high-yield integrated giant should be on your wishlist.

TTE Dividend Yield Chart
Data by YCharts.

3. A very different decision 

Clean energy is also on the minds of the management team at Royal Dutch Shell (RDS.B). The goal is roughly similar to what the other two names here are doing -- namely, using the cash cow oil and natural gas tied businesses to help fund the expansion of a renewable power operation. That's the good news.

The bad news is that Shell, unlike Enbridge and TotalEnergies, decided to hit the reset button hard when it started to more publicly shift toward clean energy. In fact, it cut the dividend by a hefty 66%. The roughly 3.8% dividend yield it offers now is near the low end of the integrated oil peer group.

But don't cross Shell off the list just yet. Focusing more on clean energy was a key piece of its overhaul. But so too was the goal of returning to dividend growth, with the intention of rewarding investors as it shifted its business model. So far, the dividend has been increased three times since it was cut, proving that Shell was serious about hiking the dividend again. And for investors looking for a dividend growth stock in the changing energy sector, it could be an interesting option.

It is worth noting that ExxonMobil and Chevron both have decades of dividend increases under their belts, which is much better than the increase streak Shell has amassed since its cut (which is just two years long, if you include 2021 as a full year). However, Shell has taken a far more aggressive stance on the clean energy front. For investors looking to toe the line between old and new energy sources, that could easily give Shell the dividend growth edge.

Out of step

There are major changes taking shape in the energy sector, with clean power clearly the ascendant technology. But that doesn't mean there aren't opportunities to invest in older energy sources and still make a lot of money. And if dividends are your thing, then Enbridge, TotalEnergies, and Shell are all worth closer looks. Shell is a bit of an odd man out in this trio given its dividend cut, but if you are focused more on dividend growth than yield it is still worth a close look.

Reuben Gregg Brewer owns shares of Enbridge and TotalEnergies. The Motley Fool owns shares of and recommends Enbridge. The Motley Fool has a disclosure policy.

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