The energy industry is a great place to collect passive income. The sector currently offers the highest dividend yield in the S&P 500 at nearly 4%, well above the index's average of around 1.5%. Because of that, income-focused investors have lots of options.
Three energy stocks that stand out for their ability to produce durable passive income are Brookfield Infrastructure (BIPC 0.77%) (BIP 0.32%), Clearway Energy (CWEN -0.32%) (CWEN.A 0.64%), and Williams Companies (WMB 1.69%). Here's a closer look at why income-focused investors should consider this trio.
1. The steady growth should continue
Brookfield Infrastructure has been an exceptional passive income producer over the years. The global infrastructure operator declared its 13th consecutive year of increasing its payout in 2022, growing it at a 10% compound annual rate during that time frame. It currently offers a 2.9% dividend yield, almost double that of an S&P 500 index fund.
Brookfield should be able to continue growing its lucrative income stream in the future. The company operates a diversified portfolio of infrastructure businesses across the utilities, energy midstream, transportation, and data sectors. They generate recurring cash flow backed by long-term contracts and government-regulated rate structures. Meanwhile, Brookfield pays out about 60% to 70% of that income to shareholders via its high-yielding dividend. That gives it some cushion while allowing it to retain some earnings to fund its continued expansion.
Brookfield estimates it can organically grow its cash flow per share by 6% to 9% per year through inflationary price increases, volume upside as the economy grows, and expansion projects. In addition, it sees its capital recycling program -- selling mature assets to invest in higher returning opportunities -- adding to its bottom line. That should support the company's plan to grow its dividend by 5% to 9% per year.
2. High-end growth ahead
Clearway Energy currently offers a 3.5%-yielding dividend. The company has been steadily growing that payout in recent years. It expects to increase it toward the upper end of its 5% to 8% annual target range through 2026.
The primary factor driving that high-end growth is the recent sale of the company's thermal assets. It received $1.46 billion of net proceeds, which it expects to allocate into cash-flowing clean energy-generating assets in the coming years. The company has deals lined up to put more than half of those proceeds to work. For example, it recently agreed to invest $100 million to $130 million to acquire a portfolio of wind energy assets from a third-party seller. Combined with other recent deals, it has a line of sight to grow its cash available for distribution from $365 million this year to $400 million as it closes these deals.
Meanwhile, the company is working to invest the remaining proceeds at attractive returns. Its success in doing so could grow its cash flow to more than $440 million in the future.
It shouldn't have a problem continuing to find attractive opportunities, given the amount of investment needed to transition the economy to renewable energy. It also has strategic relationships with a renewable energy project developer, a global infrastructure investor, and a major energy company, each of which can provide it with investment opportunities.
3. Plenty of fuel to keep growing
Williams Companies has paid dividends to its shareholders since 1974. It has steadily increased its payout since resetting it in 2016 to retain more cash to expand its operations and strengthen its balance sheet. The natural gas pipeline giant's payout currently yields 4.8%.
The company currently generates enough cash to cover that payout by more than two times, giving it a significant amount of cushion. That's allowing it to fully fund its expansion program and pay down debt, putting its payout on an even more sustainable foundation.
Williams Companies has several growth drivers that should supply it with more cash flow to grow its dividend in the future. Its natural gas transmission business alone has needle-moving growth ahead, driven by growing demand for cleaner-burning fuel. Williams is investing $1.5 billion across five projects and has 30 more worth as much as $7 billion of future investment potential in development. This pipeline could drive growth for the next decade. In addition, it's expanding its gas gathering businesses and Gulf of Mexico position and moving into lower-carbon energy. With multiple growth drivers and an improved financial position, Williams' dividend looks more durable than ever.
Sustainable income streams
Brookfield Infrastructure, Clearway Energy, and Williams Companies offer high-yielding payouts built on sustainable foundations. All three energy companies produce recurring cash flow and have strong financial profiles, giving them the flexibility to continue expanding their operations. That growing cash flow should enable them to continue increasing their dividends, making them great passive income stocks to own for the long haul.