Energy is the foundation of not only the economy but modern life, so it’s a great sector to look for long-term investment ideas – stocks that you can buy at a reasonable price and hold indefinitely. But some energy companies, like those that drill for oil and gas, can be volatile because they are affected by external factors like the price of oil.
Instead, investors should consider these energy companies: Enbridge (NYSE: ENB) and NextEra Energy (NYSE: NEE). These companies have diversified business models, including investments in renewable energy, that could be drivers of long-term growth. Both stocks offer a combination of dividends and stock price appreciation potential, and are currently trading at attractive prices.
The best part is that it doesn’t cost much: you can currently purchase both shares for just over $100. Here’s what you need to know:
3 Best Dividend Stocks
Enbridge is a Canadian energy company based in the resource-rich oil sands region of Alberta. The company derives roughly three-quarters of its profits from its oil and gas operations. Midstream BusinessEnbridge is a business that transports oil and gas through a vast network of pipelines and storage facilities across North America. The pipeline business is not as dependent on commodity prices. Instead, Enbridge generates revenue based on the volume of resources that flow through its pipelines. Enbridge also operates North America’s largest natural gas utility, selling and distributing natural gas to residents and businesses. Finally, Enbridge is also growing its renewable energy business, which currently accounts for a low single-digit percentage of its profits.
A key lesson from Enbridge’s business model is stability. Oil and gas flow constantly through Enbridge’s pipes, and people use natural gas to heat their homes and water, cook, and generate electricity, regardless of the economic climate. These stable revenue streams allow Enbridge to continue paying dividends to shareholders and increasing them for 28 consecutive years. Enbridge is also a high-yield stock. Its current dividend yield is 6.9%, while the average dividend yield over the past 10 years is 5.6%. Investors should not view the high dividend as a red flag, as the dividend payout ratio is only 65% of Enbridge’s distributable cash flow. Enbridge’s growth is more like a tortoise than a hare, so the dividend will primarily drive investment returns.
Enbridge continues to invest in large projects, which can distort earnings. Investors should treat Enbridge’s distributable cash flow like earnings and value the stock as such. The company’s shares trade at less than 12 times Enbridge’s expected 2024 distributable cash flow. Management believes cash flows will grow at a mid-single-digit rate annually from 2026 onwards. As such, the current valuation is reasonable, given the high dividend yield. Investors should be able to hold and enjoy investment returns averaging around 10% to 12% per year over the long term.
America’s Leading Utility and Renewable Energy Producer
Looking for more growth? Check out NextEra, which has grown into one of the world’s leading renewable energy producers. The company is also America’s largest electric utility, providing power to over 12 million people across 5.8 million accounts in Florida. NextEra Energy has been a long-term market outperformer thanks to the gradual transition from polluting energy sources like coal to solar and wind. Today, NextEra is a behemoth with a market capitalization approaching $160 billion.
Still, there’s plenty of growth to be had in the coming decades. According to the U.S. Department of Energy, solar and wind will account for just 13% of electricity generated domestically in 2022, but that’s expected to grow in the coming years. Additionally, broader U.S. demand for electricity is also growing. A Statista study projects that overall U.S. electricity demand will grow 27% between now and 2050. Finally, NextEra should benefit from its location in Florida, whose population and economy are already massive, but also one of the fastest-growing states, according to government data.
Investors enjoy a 2.6% dividend yield today, and management has been increasing the yield for 30 years. These big energy trends should continue to drive growth and investor returns. Analysts expect the company’s earnings to grow at 8% annually over the next three to five years. That’s roughly the same rate of earnings growth NextEra has seen over the past 15 years. While that growth won’t be surprising, the stability could make you rich. The company’s stock is trading at P/E Ratio At 23, it’s below the 10-year average of 28, making it worth buying and holding.
Should I invest $1,000 in Enbridge right now?
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Justin Pope The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Enbridge and NextEra Energy. The Motley Fool Disclosure Policy.
2 Energy Stocks You Can Buy for $116 and Hold Forever Originally published on The Motley Fool
