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The 3 Safest Energy Dividends Right Now | The Motley Fool

Environmentalists would have you believe that clean energy is going to displace carbon fuels in an almost overnight transition. For better or worse, that’s just not feasible, with the switchover more likely to happen over decades than days. This means there’s still an opportunity to invest in high-yield energy names. But you want to pick the right ones. Here are three to get you started.

1. An established line in the sand

When the economic shutdowns used to slow the spread of the coronavirus pandemic led to a steep drop in energy demand and, consequently, energy prices, one integrated oil company stood out: TotalEnergies (NYSE:TTE). The reason was because, unlike all of its closest peers, it was willing to not only state the importance of its dividend, but also to tell investors that the dividend was safe so long as oil prices averaged around $40 a barrel. That’s a line in the sand that investors can keep track of. Note that oil is currently well above that mark.

Image source: Getty Images.

However, that’s not the only thing to like here. TotalEnergies also happens to have a well-articulated plan for adjusting with the world around it for a cleaner future. At this point, the goal is to have 15% of the business tied to “electrons” — all of its non-carbon fuel businesses –by 2030, up from 5% in 2019, but management is willing to move more quickly if the world increases the pace of change.

The fact that electrons accounted for 5% of the business in 2019 is actually pretty important, since it highlights that clean energy is not a new venture for TotalEnergies. Thus, the company is growing in an area within which it has ample experience, which reduces execution risk. With a hefty 7.2% dividend yield, investors looking for an energy play that’s also a bit of a clean energy hedge should take a close look at this integrated energy giant — especially since it clearly understands how important its dividend is to shareholders.

2. Big in natural gas

Next up is Kinder Morgan (NYSE:KMI), a giant North American midstream company. Effectively, it owns the pipelines, storage, and processing assets that help move carbon-based fuels from where they’re drilled to where they get used. This is largely a fee-based business, in which Kinder Morgan collects tolls for the use of its assets, providing stable cash flows and shielding it to a great degree from the ups and downs of energy prices. The stock’s yield is an impressive 6.7%.

That said, Kinder Morgan is the largest midstream name in natural gas in North America. This fuel is expected to help support the world’s transition away from dirtier options like coal and oil and therefore should see strong demand in the years to come. That will likely translate into robust demand for Kinder Morgan’s pipes.

There is one thing here that might keep some investors away, though. In 2016, after promising a dividend increase, Kinder Morgan cut its dividend by a huge 75%. The company has gotten back on the dividend growth track, and the current dividend is well supported, but that history may unnerve more conservative dividend investors. However, those willing to forgive this transgression and recognize the business’s current strength will probably be well rewarded here.

TTE Dividend Yield Chart

TTE Dividend Yield data by YCharts.

3. The No. 2

The next name, Enbridge (NYSE:ENB), is very similar to Kinder Morgan in that it is one of North America’s largest midstream companies. As it were, it sits in the second spot with regard to moving natural gas. Before you say you only buy industry leaders, Enbridge is also the largest natural gas distributor by volume in North America. That utility business coupled with its No. 2 rank in pipelines makes it a huge player in natural gas and worth a very close look. But there’s even more to like: It generates 3% of EBITDA from a renewable power business that’s set to grow in the years ahead.

All told, Enbridge is kind of the pipeline equivalent of TotalEnergies, providing an opportunity to invest in the energy sector while hedging the bet with some clean energy investments. The yield is 6.6%. However, there’s an important differentiation here when you compare it to peer Kinder Morgan: Enbridge has increased its dividend annually for 26 consecutive years. That puts it into Dividend Aristocrat territory and shows its commitment to rewarding investors for sticking around. To be fair, Enbridge has a history of making liberal use of debt, but if that dividend streak is any guide, it has successfully navigated the risk. If you are looking for an energy stock with a big yield and a great dividend history, Enbridge should look very attractive.

Time for some deep dives

There’s no such thing as a perfect investment; there are risk/reward trade-offs involved in everything you buy. That said, if you are looking for energy stocks, TotalEnergies, Kinder Morgan, and Enbridge are all well-positioned industry giants with big yields and strong reasons to believe the dividends are safe. Kinder Morgan probably requires that most faith given its 2016 dividend cut, but right now all three appear to be in a good position to prosper even as the world shifts toward cleaner energy alternatives.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.


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