The energy industry can be a great spot for dividend investors. The sector tends to generate lots of cash flow, which companies can return to shareholders via dividends.
Enterprise Products Partners (EPD 1.29%), Clearway Energy (CWEN 0.47%) (CWEN.A 0.71%), and NextEra Energy (NEE 0.26%) are three energy dividend stocks that three Fool.com contributors believe are no-brainer buys right now. Here's why they stand out.
Reuben Gregg Brewer (Enterprise Products Partners): I like to err on the side of caution when it comes to cyclical industries like energy. With oil and natural gas prices on the high side today, it seems like a good time to hedge one's bets in the sector. There are few better ways to do that than by investing in a pipeline stock like Enterprise Products Partners, which is technically a master limited partnership (MLP).
The logic is pretty simple. Enterprise is one of the largest midstream players in North America. It owns the pipelines, storage, transportation, and processing assets that help move energy from where it gets drilled to where it gets consumed. The world doesn't operate without this infrastructure. And Enterprise largely charges fees for the use of its portfolio of assets, so the price of oil is much less important than demand. In other words, you get to sidestep the riskiest part of the energy sector -- commodity price volatility.
But that's not the full picture, because the MLP's distribution yield is a very generous 7.6%. Moreover, in the third quarter, Enterprise's distributable cash flow covered the disbursement by a huge 1.8 times. There's no reason to worry about a distribution cut. In fact, it is far more likely that the MLP will add to its 24-year streak of annual distribution hikes than that the streak will come to an end.
Powerful growth locked in
Matt DiLallo (Clearway Energy): Clearway Energy is one of the largest renewable energy producers in the country. It also operates a sizable fleet of environmentally sound natural-gas-fired power plants. Because of that, it's well positioned for a lower-carbon future.
Clearway's existing clean energy portfolio generates lots of steady cash flow. It returns a sizable portion of that money to shareholders via a dividend yielding 4.2%.
The company believes it can grow that payout toward the upper end of its 5% to 8% annual target range through at least 2026. Powering that conviction is its accretive capital recycling program. Clearway sold its thermal asset for $1.35 billion in net proceeds earlier this year. It has since completed or identified several deals to put that money to work, generating higher returns.
As a result, Clearway has the visibility to grow its cash available for distribution (CAFD) from $336 million last year (including income generated by its thermal assets) to more than $440 million over the next few years. That would boost its CAFD to over $2.15 per share, giving it plenty of room to grow the dividend from its current $1.469 per share annualized rate.
Meanwhile, the company should have ample power to continue growing its CAFD and dividend beyond that time frame. Clearway generates excess cash after paying its dividend and has a solid financial profile. That gives it the funding flexibility to acquire additional income-producing clean energy assets.
Add Clearway's high-yielding dividend to its growth potential, and the clean power producer could generate double-digit total returns for its shareholders in the coming years. That lower-risk upside potential powered by the clean energy transition makes it a no-brainer buy, especially considering the stock is down about 15% from its recent high.
Dividends that keep growing
Neha Chamaria (NextEra Energy): Climate change and its consequences are forcing some of the largest economies in the world to rethink their energy policies and switch to cleaner sources of energy. Put another way, renewable energy is an indisputable growth area within the energy sector, and investing in stocks that are already leading from the front seems like a no-brainer. NextEra Energy fits the bill.
NextEra Energy is the world's largest producer of wind and solar energy. The best part is that this company also has a large, well-established traditional utility business that's a steady cash-flow machine. So while its utility business provides stability, its clean energy business is the key to the company's growth. So far, NextEra Energy has executed well, and that has been reflected in the company's dividend and share price growth over the years. In the past 15 years, NextEra Energy grew its dividend per share at a compound annual growth rate (CAGR) of 9.8%, backed by a roughly 8.4% CAGR in adjusted earnings per share.
But what's the guarantee that you'll still be rewarded if you buy NextEra Energy stock now? There's no guarantee in the stock markets, but this company has it all to deliver and reward.
By 2025, NextEra Energy wants to become the largest and "most profitable" clean energy company in the U.S. That's not a long shot. NextEra Energy's clean energy arm already had a backlog of signed contracts worth nearly 20 gigawatts as of the end of the third quarter. That's almost 70% of its existing operational green energy capacity and should give you an idea about the company's growth potential. NextEra Energy is also confident of growing its annual dividend per share by around 10% through "at least" 2024.
So if you buy NextEra Energy stock now, you're getting a 2% yield and can expect around 10% annual dividend growth every year, which should be well supported by earnings and cash-flow growth. It's a great investment opportunity, I'd say.