Passive income in the form of dividends is a powerful way to create cash you can live off of in retirement. And the best part is that dividends help you to avoid touching your nest egg. If that sounds good to you, then you might want to look at Enbridge (ENB -2.31%), an energy sector stalwart that's readying for the future.
The core business
Enbridge isn't exactly an ESG investor favorite, given that roughly 58% of its earnings before interest, taxes, depreciation, and amortization (EBITDA) is tied directly to oil extraction. Another 26% of EBITDA is derived from natural gas drilling. But here's the key: Enbridge is not a wildcatter, it is a pipeline company. That means it generates fees for transporting oil and natural gas, shielding it to some degree from the price swings inherent to these businesses. The demand for oil and natural gas is more important than the price, at least for Enbridge. On top of that, Enbridge also operates a natural gas utility business. This division makes up 12% of EBITDA.
Image source: Getty Images.
All in, carbon-fuel-related operations account for a huge 96% of Enbridge's EBITDA. It's a good thing that clean energy is unlikely to replace oil and natural gas for decades to come. In fact, by some estimates, absolute demand for oil and natural gas is likely to increase through at least 2040. That's expected even as clean energy investment continues at a robust pace because, to put it simply, energy transitions take decades, not days. The world needs an "all of the above" strategy until clean energy is further advanced.
The takeaway for investors is that Enbridge likely has a long string of solid cash flows ahead from its carbon-tied businesses.
There's more to this story
That said, it's important to note that Enbridge is expecting its oil business to become smaller over time. In fact, of the company's $9 billion in planned capital investment, there's no material allocation for its oil business. Getting larger will be its natural gas operations. Natural gas is often seen as a transition fuel, since it is cleaner burning than coal and oil.
Also increasing in importance within the portfolio is the 4% of EBITDA that's currently tied to clean-energy investments. This is the real key to the Enbridge story, even though the company's collection of solar and wind investments is pretty tiny today. Over the next three years, Enbridge has a series of offshore wind projects that should come on-line. That will roughly double the company's wind capacity. It is, essentially, using the carbon operations to help fund its clean energy investments.
But these wind projects are just the headline act. Behind this investment is a series of other capital projects, from using solar to power Enbridge's own operations to examining the potential of renewable natural gas and hydrogen assets, among other technologies. This is not a passive management team that is content sitting with cash-cow assets. It is constantly looking for ways to change along with the world around it.
Collecting the cash
The generous 6% dividend yield is also just the top-level draw here when it comes to income investors. There's also the Dividend Aristocrat status, which shows a clear commitment to dividend growth. And the fact that management believes it can grow distributable cash flow between 5% and 7% a year for the foreseeable future, with dividend growth roughly in line with that figure over time. So not only is this a solid energy company that's looking to change with the clean energy times, but it is looking to keep your passive income stream growing, too. If you are a long-term energy investor, that's a story you should really like.
