From the unnerving fluctuation in oil and gas prices to regulatory uncertainty and fears of rising interest rates, investors in energy stocks have had to brave a lot of volatility in recent times. In fact, to put that volatility into perspective, consider that energy was the top-performing sector in 2021 after languishing right at the bottom in 2020.
That stunning recovery might lead many investors to believe they missed the bus, but some top energy stocks haven't received as much love from the market and look unbelievably compelling right now. Case in point: NextEra Energy (NEE 0.34%) and Kinder Morgan (KMI 2.53%). Here's why you'd want to buy these top energy stocks right now.
Earn steady passive income from this 6% oil and gas stock
Neha Chamaria (Kinder Morgan): The investing thesis for Kinder Morgan is a pretty compelling one right now, and it has little to do with rising oil prices. The thing is, while betting on oil and gas stocks to play the oil price rally might work in the short run, it's anyone's guess how long the rally will last. If oil prices cool down, the market won't think twice before dumping oil stocks. During times like these, a high-yielding stock like Kinder Morgan that can earn you steady income even during volatile times could be your best bet.
Image source: Getty Images.
To be sure, Kinder Morgan stock has risen in recent days alongside oil and gas prices, but that still makes the stock a solid buy. Kinder Morgan is one of the largest energy infrastructure companies in North America and primarily stores and transports natural gas and refined products under long-term, fee-based contracts. From barely 2,000 miles of pipeline in 1997 when the company was formed to 83,000 miles as of the end of 2021, Kinder Morgan has come a long way.
2021 was a record-cash-flow year for Kinder Morgan, and the company is confident of generating enough cash flow this year to increase the dividend by around 3% and support its high yield of around 6% even as it expects to pump $1.3 billion on expansion. That should still leave the energy giant with a lot of money to spare, and I'm confident it'll put that money to use by keeping shareholders' interests in mind, including share buybacks.
There's another thing to like about Kinder Morgan: It's a play on natural gas, which is also the cleanest fossil fuel. So even in a world that's shifting from fossil fuels to clean energy, Kinder Morgan can still use its extensive pipeline and expertise to transport natural gas and other alternative fuels. That should only add to the stock's appeal, which is anyway attractive at the current price and its high dividend yield.
A recent sell-off has this clean-energy leader looking more attractive
Matt DiLallo (NextEra Energy): Shares of utility NextEra Energy have tumbled more than 20% to start 2022. That's mainly due to the unexpected retirement of longtime CEO James Robo. While investors don't like uncertainty, Robo is leaving the company in good hands.
For starters, his replacement, John Ketchum, is a company veteran who has served as its chief financial officer and the CEO of its fast-growing energy resources segment. Given that experience working in those key roles alongside Robo, he likely won't deviate from the company's winning strategy.
Meanwhile, NextEra is on track to continue growing at a brisk pace over the next few years, powered by its investments in clean energy. The company anticipates delivering double-digit earnings-per-share growth again in 2022. It then sees earnings per share expanding at or near the top end of its 6% to 8% annual target range through 2025 off of this year's higher base. Because of that and the company's conservative dividend payout ratio, NextEra expects to deliver roughly 10% annual dividend per share growth through 2024.
Following NextEra Energy's sell-off, investors get all this growth for a much lower price. The utility now trades at a forward price-to-earnings ratio of around 26 times, well off its peak of 36 times to start the year. Meanwhile, the sell-off and recent dividend increase have pushed its yield to a much more attractive 2.3%.
With a more reasonable valuation, higher dividend yield, and excellent long-term growth potential, NextEra looks like a great energy stock to buy right now.
The better buy
Investing in energy stocks comes with its fair share of risks. So if an oil and gas stock is vulnerable to the volatility in commodity prices, renewable energy stocks are subject to tight regulation, and their growth depends entirely on the global pace of adoption of clean energy. Kinder Morgan and NextEra Energy are both established and well-run companies with tenable growth catalysts. NextEra Energy is, in fact, pretty much a growth stock, while Kinder Morgan is the kind of stock an income investor would want to own to earn steady passive income. Invest some money in both stocks, and you could enjoy the best of both worlds.
