Climate change, and the potential impacts it will have, remains an issue without definitive conclusions, but there's no question that the world is trying to shift away from fossil fuels and toward cleaner and renewable alternatives. The process has just been very slow, as all energy transitions tend to be. That's why investors looking for high-yield energy investments will likely find Enterprise Products Partners (EPD 0.18%) and TotalEnergies (TTE -1.28%) enticing places to park $1,000 today.
1. The cleanest dirty shirt
Carbon fuels are not all equal when it comes to emissions. The really dirty options, like coal and heavy oils like bunker fuel, are materially less desirable than a cleaner-burning fuel like natural gas. Fortunately for investors, master limited partnership (MLP) Enterprise Products Partners has been focusing on natural gas and natural gas liquids for decades, which is expected to be a transition fuel as the world shifts away from dirtier energy options. The MLP's yield is a hefty 8% today. It's also worth noting that Enterprise Products has increased its distribution annually for 24 consecutive years.
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The most exciting part of the story here, however, is that Enterprise Products has a portfolio of midstream infrastructure assets that would be virtually impossible to replace. It charges fees for its pipelines, storage, processing, and transportation assets, which helps insulate investors from the inherent ups and downs of energy prices. Meanwhile, the MLP's distributable cash flow covered its distribution by a huge 1.9 times in the second quarter, suggesting there's ample room for adversity before the distribution would be at risk. It also suggests that there's plenty of room for further distribution increases as well -- the 1.2 times coverage has historically been considered strong in the midstream sector.
For those thinking about the slow shift toward clean energy, Enterprise's natural gas efforts should help support cash flows for a long time. But the assets it owns could also be used for other purposes such as the transport of renewable (biodiesel) and clean fuels (hydrogen).
2. The biggest yield of the bunch
Integrated energy giant TotalEnergies has assets that span from the upstream (production) to the downstream (refining and chemicals). It too is slowly shifting away from oil and toward cleaner alternatives (liquified natural gas). However, the French company is also building a clean energy division that generates, sells, and transports electricity.
The electric operation was roughly 5% of the business in 2019, but management is looking to expand it to 15% by 2030. Over that span, oil's importance will shrink and natural gas' size will increase as TotalEnergies tries to grow its carbon operation at the same time it is building the clean energy business. It is working diligently toward these goals, with acquisitions playing a major role. The fact that the company's net income more than doubled year-over-year in the second quarter has given it ample firepower to support its heavy spending on this transition. This is a middle-of-the-road approach for investors who believe the energy transition is important, but that it will be a slow process and not an overnight success.
Meanwhile, TotalEnergies' dividend yield sits at around 6.1%. That's higher than the company's closest peers. And, notably, it is the only one of its peer group that has announced a clean energy shift while still managing to maintain its dividend. BP and Shell both cut their dividends when they announced similar plans, and Exxon and Chevron aren't pushing as hard on the clean energy front. That makes TotalEnergies the middle-of-the-road option in the energy space, but for conservative long-term income investors that could be the perfect fit.
High yield, with a twist
Investors love big yields, but you have to make sure those payments are sustainable over time. Enterprise Products Partners' cash-generating infrastructure assets and an increasing focus on a key transition fuel should support its huge yield for years to come. TotalEnergies, meanwhile, is using today's carbon fuel profits to support its clean energy transition. Meanwhile, investors can collect an industry-leading yield while they watch the energy giant shift with the world around it. If you have a grand to invest, both of these energy names should be high on your income buy list.
