If there's one theme in the energy sector that has gotten plenty of attention over the years, it is the global transition from dirty carbon fuels to cleaner alternatives. It is a very real phenomenon, though it is happening much more slowly than clean energy proponents would like. And that creates an interesting investment opportunity that even passive income investors who love high-yield dividend stocks can jump on.
Here's why Enbridge (ENB 0.05%), TotalEnergies (TTE 0.26%), and Brookfield Renewable (BEP -0.26%) (BEPC -0.70%) are three interesting stocks to examine right now given this heightened interest, especially if you are looking to build a passive income stream in the energy sector that will last for decades into the future.
1. Enbridge has an interesting goal
Roughly 50% of Enbridge's earnings before interest, taxes, depreciation, and amortization (EBITDA) comes from oil pipelines. Another 25% is derived from natural gas pipelines. At the start of 2023, those two figures were 57% and 28%, which is an important change because it was driven by the Canadian midstream giant's acquisition of natural gas utilities. Its utility division grew from 12% of EBITDA to 22%, with a 3% exposure to renewable power staying largely the same.
One of Enbridge's big goals is to provide the world with the energy it needs as the world's energy needs change. Natural gas, which is cleaner burning than coal or oil, is acting as a transition fuel for the clean energy shift. And, thus, the company is looking to expand its exposure to natural gas. But don't overlook the 3% of EBITDA that's in the renewable power space. Management is also looking at the steps it needs to take beyond natural gas, as well, though it appears to believe it has ample time to build this business given the likelihood of a multi-decade energy transition.
Meanwhile, Enbridge has an investment grade-rated balance sheet. It has increased its dividend, in Canadian dollars, on an annual basis for 30 straight years. And its distributable cash flow payout ratio is right in line with its 60% to 70% target payout range. The yield is a lofty 6.4%.
2. TotalEnergies is a bit more risky than Enbridge
What is interesting about Enbridge is that it operates in the midstream segment of the broader Energy Sector. Midstream assets are largely fee-driven and provide reliable cash flows. Some investors might prefer a bit more commodity exposure, which is where TotalEnergies comes in. This French company is one of the world's largest integrated energy giants, with assets that span from oil and natural gas production all the way through to the chemicals and refining side of the business. While having exposure across the energy sector helps to soften the industry's inherent volatility, TotalEnergies still exposes investors to oil price variability. Oil prices have been weak of late, pushing the company's shares lower and its yield up to 5.9%.
What separates TotalEnergies from its closest peers is that it has been aggressively pushing into the clean energy and electricity space as it looks to adjust with the world around it. At this point, its integrated power division (where clean energy lives) made up roughly 10% of segment profits through the first nine months of 2024. And it is making this transition without resorting to a dividend cut, which is what European peers BP and Shell did when they announced similar plans. ExxonMobil and Chevron haven't invested nearly as heavily in the energy transition.
All in, TotalEnergies is using its oil and gas profits to build a business that may, someday, end up replacing oil and gas. If you believe the long-term future is green, TotalEnergies is probably the integrated energy giant you should be looking to own.
3. Brookfield Renewable is all in on clean energy
Both Enbridge and TotalEnergies are bridging the gap between today's energy needs and tomorrow's needs. Brookfield Renewable, and its yield of up to 5.9%, is a high-yield way to focus on clean energy. And given the fact that there's likely to be a multi-decade runway for growth ahead, there's no particular reason to believe that Brookfield Renewable can't provide decades of passive income.
What's unique here, however, is that Brookfield Renewable is run by Brookfield Asset Management (BAM -1.32%), a highly respected Canadian asset manager with a long history of investing in the global infrastructure sector. Basically, Brookfield Renewable is a way to invest alongside Brookfield Asset Management. That's fine, but it changes the equation in some ways because Brookfield Renewable is very aggressive with the way it manages its portfolio of assets. Typically it buys clean energy assets when they appear cheap, works to improve operations to increase the value of the assets it buys, and then sells assets when it can get a good price.
While there are some assets in the portfolio that probably won't ever be sold, you have to go in understanding that Brookfield Renewable is run more like an asset manager than an electric utility. This fact also helps explain the two different share classes, with a partnership class and a corporate share class, both of which represent the same entity. However, demand for the corporate share class, which is more popular among larger investors (which is basically the reason it was created, since it allowed Brookfield to tap a broader investor pool for growth capital), has left it with a lower yield of 4.7%. All in, however, if you want to focus on clean energy, Brookfield Renewable's globally diversified portfolio and high yield should put it high up on your list of options.
3 stocks for the investor who thinks the energy market is changing
Oil and natural gas will likely be needed for decades to come, so you could stick to companies that are ignoring the clean energy transition and probably be OK. Brookfield Renewable, however, is akin to jumping into the clean energy pool with both feet. The modest and growing clean energy exposure offered by Enbridge and TotalEnergies, meanwhile, will be solid choices for those who prefer to dip a toe in before jumping. All three will allow you to hedge your energy bets while still collecting high yields for years to come.
