Energy doesn't magically get from where it is created (or drilled) to where it gets used by end customers. Large physical assets support that and, thus, your daily modern life, all while tossing off reliable cash flows to the owners of those assets. Investing in infrastructure-related energy stocks, meanwhile, can be a very good way to generate income for your portfolio since many pay generous dividends. That's particularly true for names like Enterprise Products Partners (EPD -0.41%), Dominion Energy (D -0.51%), and Brookfield Renewable Partners (BEP -1.66%). Here's why you might like each of these options.
1. Out of favor
Master limited partnership (MLP) Enterprise Products Partners has a huge 7.5% distribution yield. That's toward the higher side of its historical yield range, suggesting it is relatively cheap today. That valuation call makes some sense, given the out-of-favor status of oil and natural gas in a world that is increasingly focused on clean energy.
Only there's no way to go from using carbon fuels to clean energy without a long transition period. And that's why Enterprise is so interesting.
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The MLP owns midstream assets like pipelines and storage, processing, and transportation assets. It is paid fees for the use of its assets, with the actual price of the commodities that flow through its system far less important than the demand for its system. And Enterprise is one of the largest midstream players in North America, sporting a roughly $50 billion market cap.
Moreover, it has the scale and diversification to consolidate the industry, which has faced new construction headwinds. In fact, in January, it inked a $3.5 billion deal to buy privately held Navitas Midstream Partners. Enterprise is unlikely to be an exciting investment, but as long as the world needs oil and natural gas, it should keep throwing off a reliable stream of cash to investors.
2. Refocus on boring growth
Over the past decade or two, Dominion Energy has been reshaping its portfolio, selling off energy drilling assets and, most recently, a collection of midstream pipelines. At this point, it is mostly just a regulated utility, selling electricity and natural gas to around 7 million customers across 13 states.
Being regulated is a mixture of good and bad. On the bad side, Dominion has to get rate hikes approved by regulators and, historically, that has limited growth potential. But looking at the good here, the utility has a monopoly in the markets it serves.
The investments it makes to keep its systems in top form (and that support its rate increases), meanwhile, are largely unaffected by other things going on in the world, like bear markets and recessions. So it's a bit of a slow and steady tortoise.
One thing of note here is that the midstream sale noted above came with a dividend cut, given that the division was a big piece of the company's business. But from here, Dominion is looking to increase the dividend at a 6% annual rate with a lower payout ratio than before the sale. So it is, arguably, a better business now than it was before. That dividend growth, meanwhile, is backed by $37 billion worth of capital investment plans over the next five years. And, as noted, most of that spending will take place regardless of what's going on in the market.
Electricity is a vital piece of modern life, and you can collect a generous 3.2% yield and growing dividend from Dominion Energy, now a pure-play utility.
3. Going clean
Dominion Energy's capital spending plans include a healthy dose of clean energy investment, as you might expect. However, if you are an ESG-focused investor, you might want to get even more specific with your infrastructure investment plans. A good option would be Brookfield Renewable Partners, which only does clean energy.
What's interesting about Brookfield Renewable, however, is that it has a highly diversified portfolio and strong core of reliable baseload assets (defined as those that can cover the minimum level of demand on an electrical grid over a span of time). Before you protest that wind and solar are intermittent energy producers, note that roughly half of this partnership's cash flow comes from hydroelectric power. The other half is from intermittent assets like solar and wind and other investments meant to help offset that variability, like battery storage.
It's kind of an all-in-one clean energy play. It also provides geographic diversification, with investments spanning North America, South America, Europe, and Asia.
And, along with all of that diversification, you get to collect a generous 3% distribution yield. The dividend, meanwhile, has been increased annually (adjusted for a spinoff) for roughly a decade at a 6% annualized rate. That's right in line with the long-term goal of 5% to 9% distribution growth each year.
For dividend investors, Brookfield Renewable Partners is a solid way to get exposure to clean energy while still generating a healthy bit of cash flow.
A diverse set of options
The trio of stocks here take you from a focused oil and gas infrastructure name to a focused clean energy play, with a stop for a boring old utility in between. Given that range, it's unlikely that all three will interest you, but there's likely one name here that would make a good addition to your portfolio today.
