The single most important fact to understand about energy stocks is that they can be very volatile. That's inherent to the industry, given that oil and natural gas are commodities. There's one more complication here, however, since clean energy is an increasingly important source of power around the world. Here are two high yield energy stocks to buy now and hold for the long term that take both of these factors into consideration.
The negatives you have to consider in the energy patch
The price of West Texas Intermediate (WTI) crude oil, a key U.S. oil benchmark, fell below zero at one point during the worst of the coronavirus pandemic. There were technical reasons for that dramatic, and shocking, price decline, but it highlights the very real downside risk when it comes to owning energy stocks. And just a couple of years later WTI was trading hands at well over $100 a barrel. Which shows not only the upside potential, but the rapid sentiment shifts that can take place in the industry. While this particular swing was extreme, dramatic ups and downs are very common.
WTI Crude Oil Spot Price data by YCharts
That's a short-term problem that energy investors have to contend with. A longer-term issue is the fact that clean energy is, slowly, displacing oil and natural gas in the energy sector. This is likely to be a decades-long transition, but the world is very clearly moving toward cleaner energy sources. For example, coal has been losing ground in the U.S. electricity space to natural gas, which is cleaner burning. And, all the while, solar and wind power have been ramping up at an incredible clip, albeit from a small base.
If you are a dividend investor looking at the energy sector and want to take a buy and hold approach, you need to keep these two factors in mind. Which is why TotalEnergies (TTE -0.86%) and Enbridge (ENB -0.79%) will be good high yield investment choices.
Strong foundations with a clean energy hedge
TotalEnergies is one of the largest integrated power companies on planet Earth. Its portfolio is both geographically diverse and spread across the entire energy sector, from the upstream (oil production) through the midstream (pipelines) and all the way into the downstream (chemicals and refining). This diversification helps to soften the inherent swings of the energy sector, since each segment of the industry operates a bit differently through the cycle. Add in a 5.5% dividend yield (U.S. investors have to pay French taxes, but can claim a portion of that back come April 15) and you have a pretty solid investment option in the energy patch.
But it gets better because TotalEnergies has made an explicit commitment to investing in clean energy. While peers BP (BP -0.33%) and Shell (SHEL -0.43%) made the same commitment, they cut their dividends as they announced their plans. TotalEnergies maintained its dividend, specifically because it knew that investors cared deeply about the income the stock generated for them. TotalEnergies' clean energy business, which it calls integrated power, grew 20% year over year through the first nine months of 2024 and it made up roughly 10% of adjusted net operating income. This is a real commitment and one that provides a hedge for investors that are thinking long term. The best part, perhaps, is that TotalEnergies is using profits from its carbon energy business to expand into the clean energy future.
Enbridge is a very different beast. It is one of the largest midstream companies in North America, owning the vital energy infrastructure (like pipelines) that helps to move oil and natural gas around the world. It largely charges fees for the use of its assets, which tends to lead to very consistent cash flows over time. That's how it supports its lofty 6% dividend yield and how it has managed to increase its dividend for three decades, and counting. As far as energy stock go, this is one that's a very consistent income producer.
What's interesting about Enbridge over the long-term is that it is specifically looking to change with the world around it. That's why it has been investing in natural gas, a move that has effectively reduced its reliance on oil (which is now down to about 50% of earnings before interest, taxes, depreciation, and amortization). And why it has a small, but growing, clean energy business. Essentially, like TotalEnergies, Enbridge is using the cash it generates from dirtier energy sources to build its business around cleaner energy sources. Which is exactly the type of thing a long-term dividend investor would like to see happen.
Thinking long term and keeping it simple
If you are looking at the energy sector today you have to keep in mind the volatile nature of energy prices and the long-term shift toward clean energy that is taking shape. TotalEnergies and Enbridge do both of those things and offer attractive dividend yields, too. If you want to buy and hold, these are two great high yield energy options to consider right now.
