Oil and natural gas prices plunged during the early days of the pandemic in 2020, causing investors to run from just about all energy-related companies. Since that nadir, energy prices have rallied, leading investors to rush back into energy stocks. This type of short-term, reactionary thinking isn't new, but given the current situation in the energy market, long-term investors really need to think more strategically. That is why TotalEnergies (TTE -0.35%) and Enbridge (ENB -0.24%) are my two top dividend-paying energy investments.
Ups and downs are normal
One of the most important things to understand about the energy sector is that it is prone to dramatic, and often swift, price swings. Oil and natural gas are commodities and they are economically sensitive, so the big swings over the past few years are, perhaps, eye-catching -- but they are hardly unusual. You, and the companies you invest in, need to be prepared for this kind of cyclical performance.
That is why larger, diversified energy companies, like integrated energy giant TotalEnergies -- which does everything from produce oil to refine it -- are likely to be a better fit for most investors than small wildcatters that only produce oil and natural gas. It's also why a company like Enbridge, which charges tolls for the use of its midstream energy infrastructure assets, is a good call, since energy prices are less important than energy demand in the midstream space.
But there's another important current running through the energy sector today, and that's the broad global shift toward clean energy. To be fair, this isn't as big a near-term threat as many might believe by looking at the headlines. Energy transitions take decades to complete, so oil and natural gas are likely to remain vital to the global energy market for a long time into the future. However, if you are a long-term investor, you should probably be starting to think about the issue right now.
The best of today and tomorrow
TotalEnergies, for example, has laid out a plan, and is acting on it, to materially increase its exposure to clean energy. It is looking to triple the size of this division over the decade ending in 2030. By that point it is projected to be roughly 15% of the company's business. And, unlike peers BP and Shell, which have put out similar clean-energy plans, TotalEnergies made this pledge without announcing a dividend cut. Put simply, the Board knows exactly how important the dividend is to shareholders, and plans to reward them for sticking around even as the company changes with the world around it.
Enbridge doesn't have a set goal on the clean energy front, but it is clearly preparing for a different future. For example, it is putting more capital investment into natural gas, which is considered a transition fuel, than oil. And it is investing heavily in clean energy, a division that only makes up around 4% of earnings before interest, taxes, depreciation, and amortization (EBITDA) today. Putting a number on that, clean energy is slated to get roughly 30% of the company's capital spending despite its diminutive contribution to the overall business. Enbridge has also increased its dividend for 27 consecutive years.
The cash is flowing
Ultimately, both TotalEnergies and Enbridge benefit from today's high energy prices and still-strong demand, even as they prepare for a different tomorrow. On the income front, meanwhile, TotalEnergies is offering a peer-leading dividend yield of roughly 5.5%. Enbridge's yield is a similarly impressive 6.4% or so. Both companies are foreign, so foreign taxes have to be paid and the actual dollar value of the dividends will fluctuate along with exchange rates. However, if you are looking for high-yield energy companies that you can comfortably own for the long term, this pair should definitely be on your short list.