The modern world doesn't exist without energy, so no portfolio is complete without at least a little exposure to the broad energy sector. If you're nearing retirement and trying to build a solid passive income stream to support you after you stop working, it's time to take a close look at Chevron (CVX 0.44%), The Southern Company (SO 0.90%), and Enbridge (ENB 0.68%). Here's a quick overview of each to get your research started.
1. The strongest of the bunch
Oil and natural gas are volatile commodities, which is why Chevron has long placed such a high priority on conservative operations and financial strength. For example, it's an integrated oil company with operations spanning from the drill bit to the gas pump.
This is beneficial because some of its businesses (refining) often thrive at the exact time that others are struggling (oil production), helping to even out performance over time. As for financial strength, Chevron probably has the strongest balance sheet in the integrated energy major peer group, with a debt-to-equity ratio of just 0.2 times.
The proof of this energy-giant's strength shows through most notably in its dividend. Chevron has increased its dividend payment annually for 35 consecutive years, despite the highly cyclical nature of the oil and natural gas space. That makes it a Dividend Aristocrat.
What's extra interesting here, however, is that inflation has driven up the price of energy and, thus, the price of Chevron's stock. So Chevron can offer an inflation hedge for long-term investors -- a good thing if you're creating a dividend-generating retirement portfolio. The yield today is 3.8%.
2. Clean and reliable
Southern Company has held its dividend steady or increased it for 75 years. While the dividend has "only" been increased annually for the last 21 years, it's hard to beat the long-term reliability of the dividend payments.
Reliability, meanwhile, is a key factor for this large domestic electric and natural gas utility. The current yield is 3.7%.
There's one small problem with Southern, though. The utility is still working on a massive capital-investment project that's over budget and delayed. That said, an end is finally in sight for the two new Vogtle nuclear-power plants, which are slated to come on line in 2023.
Once that's done, a major business headwind will turn into a tailwind because, assuming the plants operate as expected, Southern will have additional environmentally friendly base-load power. In a world that's increasingly supported by electricity, that will be a big plus for this reliable dividend payer and its shareholders.
3. Shifting in a new direction
Canadian midstream giant Enbridge is also working on the clean-energy front via the development of offshore wind farms in Europe. Clean energy is just 4% of the company's earnings before interest, taxes, depreciation, and amortization (EBITDA) today, but it's getting a huge 30% or so of the company's investment dollars right now.
This is a big priority for management as it looks to support the stock's hefty 6.3% dividend yield. The dividend, meanwhile, has been increased for 27 consecutive years.
What's most interesting for investors looking for reliable passive income streams is that Enbridge is currently generating $2 billion more cash than it needs to cover capital investments and the dividend. That's being driven by its cash cow and largely fee-based oil and natural gas operations (the rest of the business), and provides a huge cushion to the dividend, in case of adversity.
At the same time, it gives management the opportunity to put that cash to work in other ways, like stock buybacks (the current focus), debt reduction, acquisitions, and additional internal investment. Put simply, Enbridge's dividend looks rock solid and is likely to keep growing for years to come.
They just keep on paying
The one factor that ties Chevron, The Southern Company, and Enbridge together is their commitment to the dividends they pay. Meanwhile, each sits in a very different part of the energy landscape, so you may find a place for all three in your portfolio once you do a deep dive.
