Roughly 40% of tax filers get a refund each year. If that includes you, you might be wondering what to do with that windfall. You could spend it on something nice, use it to pay off some debt, or save it for a rainy day.
Investing it is another option. One place to consider putting that money is the energy sector, which offers the potential to earn income and grow the value of your tax refund. Enbridge (ENB 0.10%), NextEra Energy (NEE 0.51%), and Kinder Morgan (KMI +0.76%) stand out to a few Fool.com contributors as excellent energy stocks to consider buying with your tax refund (or any other source of cash you have available to invest).
Enbridge has rewarded investors for 30 years (and counting)
NYSE: ENB
Key Data Points
Reuben Gregg Brewer (Enbridge): There are two big dividend numbers when it comes to Canadian midstream giant Enbridge. The first is its lofty 6.2% dividend yield, noting that the S&P 500 is only offering a 1.2% yield and the average energy stock just 3.3%. If you are looking for yield in the energy sector, Enbridge has you covered.
The next dividend number is 30, as in three consecutive decades' worth of annual dividend increases (in Canadian dollars). That's an impressive streak when you consider the inherent volatility of the energy sector.
This brings up a third big fact: Enbridge's midstream business effectively charges fees to connect the upstream (energy producers) to the downstream (chemicals and refining companies) and the rest of the world. The energy sector wouldn't be able to operate without the toll-driven services Enbridge offers, so the company's cash flow tends to be resilient even during energy industry downturns. Thus, the solid and growing dividend.
There's another, more subtle, reason to like Enbridge, too. Only about 75% of its earnings before interest, taxes, depreciation, and amortization (EBITDA) comes from oil and natural gas pipelines. The rest comes from regulated natural gas utilities and renewable power investments, which help to both diversify its business and hedge it against the broader shift toward cleaner energy sources.
The only major negative with Enbridge is that the yield is likely to make up the lion's share of an investor's total return. But if you're looking for a high-yield energy investment to boost the passive income you are generating, this energy stock should be high up on your list of options.
Plugged into a powerful growth megatrend
NYSE: NEE
Key Data Points
Matt DiLallo (NextEra Energy): Electricity demand in the U.S. should surge over the coming years. Analysts anticipate that power demand will increase by 55% over the next two decades, a massive acceleration from the 9% growth in demand during the last 20 years. Several factors will power this surge, including onshoring manufacturing and AI data centers.
The massive uptick in electricity demand will drive the need for significantly more power production capacity, especially from cleaner sources like renewables and natural gas. That plays right into the strategy of NextEra Energy, which is the world leader in renewables and operator of one of the country's largest natural gas-fired generation fleets.
NextEra Energy has already lined up a massive backlog of renewable energy development projects. By the end of 2027, the utility expects its energy resources segment to operate about 75 gigawatts of renewable energy capacity, which would be larger than the installed renewable energy capacity of all but seven countries. It's also looking for opportunities to expand its gas-fired generation capacity, which it intends to pair with low-cost renewables.
The company's growth drivers should fuel adjusted earnings growth at or near the top end of its 6% to 8% annual target range through at least 2027. Meanwhile, it expects to grow its 3.2%-yielding dividend by about 10% per year through at least 2027.
Given its leadership, strong financial profile, and the immense demand for power, NextEra Energy should be able to continue growing its earnings and dividend at healthy rates for years to come. Those growth drivers could enable the company to produce powerful total returns over the long term, helping to turn your tax refund into a much bigger future windfall.
A promising dividend growth stock
NYSE: KMI
Key Data Points
Neha Chamaria (Kinder Morgan): Kinder Morgan stock crushed the market in 2024, rallying 55% and more than doubling the S&P 500's returns. While past performance is no guarantee of future results, Kinder Morgan has what it takes to generate market-beating returns. I'll give you three reasons why: business model, growth projects, and dividend growth.
Kinder Morgan operates the largest natural gas transmission network in the U.S., spanning nearly 66,000 miles and moving almost 40% of all natural gas produced in the U.S. It is also the largest independent transporter of refined products. Kinder Morgan generates highly predictable cash flows, since 95% of its cash flows come from take-or-pay or fee-based contracts, or are hedged.
The stability in its cash flows supports regular dividends. Kinder Morgan has increased its dividend for eight straight years now.
2024 was a significant year for Kinder Morgan, as it bolstered its portfolio with acquisitions and grew its backlog to a whopping $8 billion, from only $3 billion in 2023. Kinder Morgan expects to put around $2 billion of its backlog into service this year, and projects double-digit growth in its adjusted earnings per share (EPS). But with the company closing yet another acquisition after its last earnings release, Kinder Morgan could report even better numbers for 2025, paving the way for strong cash flow and dividend growth in the years to come. The stock also yields a juicy 4.3%.
