The energy sector is steadily shifting fuel sources. It's pivoting away from greenhouse gas-emitting fossil fuels toward cleaner alternatives. This multidecade transition will require an enormous investment.
Several companies have emerged as early leaders in the energy transition. That makes them great energy stocks to buy and hold for the long haul. Those with $5,000 to invest in the energy transition megatrend might want to spread that capital around five of the sector's top players: Brookfield Renewable, Clearway Energy, Enbridge, Kinder Morgan, and NextEra Energy.
Leading the renewable revolution
Brookfield Renewable is one of the largest renewable energy producers in the world. It owns a globally diversified portfolio of hydroelectric, wind, solar, and energy transition assets. It sells this power under fixed-rate power purchase agreements, enabling it to generate very stable cash flow.
Brookfield has an enormous backlog of renewable energy development projects to power future growth. It has 62 gigawatts (GW) of projects under development, enough to power 9 million homes for one year.
Along with higher power prices, this development pipeline will help drive 6% to 11% annual growth in its funds from operations. In addition, Brookfield sees acquisitions adding up to 9% to its bottom line each year. It sees a massive opportunity to acquire legacy energy companies to accelerate their energy transition. Add in a 3.8%-yielding dividend that Brookfield aims to grow by 5% to 9% per year, and it could deliver powerful total returns over the long term.
A fully powered dividend growth engine
Clearway Energy is one of the largest renewable energy producers in the U.S. In addition, it owns a sizable portfolio of environmentally sound natural gas power plants. It sells the power these facilities produce under long-term contracts to electric utilities and other large power users. That enables it to generate steady cash flow to support its 4.4%-yielding dividend.
Clearway expects to grow that payout by as much as 8% per year through 2026. Powering the company's forecast is its vast pipeline of investment opportunities. Clearway already has several new investments under contract. Meanwhile, it has a relationship with a renewable energy project developer giving it access to an extensive pipeline of future opportunities. Clearway also has ample funding to complete new investments after agreeing to sell its thermal business for $1.9 billion. These factors give it plenty of power to grow shareholder value in the coming years.
Slowly transitioning to cleaner fuel sources
Enbridge operates an extensive portfolio of energy infrastructure assets, including oil and gas pipelines and renewable energy generating facilities. Currently, fossil fuels supply the bulk of its cash flow. That gives Enbridge the money to pay a healthy dividend -- it currently yields 6.6% -- and invest in expansion projects.
Increasingly, Enbridge is investing in infrastructure to support cleaner energy. It has several natural gas transmission, distribution, and storage expansions underway and a growing pipeline of renewable power and new energy projects, including several offshore wind farms in Europe. Enbridge believes these investments will support 5% to 7% annual cash flow per share growth through 2024.
That should support future dividend increases, enabling Enbridge to extend a streak that currently stretches 27 straight years. Meanwhile, Enbridge is seeking out opportunities to invest in lower-carbon energy, including carbon capture and storage, renewable natural gas, and hydrogen. These investments could give it the fuel to continue growing its dividend in the coming years.
Focused on clean fuels
Kinder Morgan is a lot like Enbridge. It operates a large-scale energy infrastructure business currently focused on fossil fuels. That gives it the cash flow to support its 6.6%-yielding dividend and invest in expansion projects.
It's increasingly investing in projects to support the production and movement of cleaner fuels. In addition to expanding its industry-leading natural gas network, Kinder Morgan is building renewable natural gas production facilities and renewable diesel hubs. Meanwhile, it's exploring opportunities to leverage its existing infrastructure to support carbon capture and storage and hydrogen. This clean fuels infrastructure focus should give Kinder Morgan the power to keep growing its dividend.
A leader in renewable energy
NextEra Energy is the global leader in producing power from the wind and sun. It's also a leader in energy storage. These businesses provide the company with steady cash flow to support a 2.3%-yielding dividend and the continued expansion of its clean energy infrastructure.
NextEra believes it can grow its earnings per share by 10% this year and by as much as 8% annually through 2025. That should support around 10% annual dividend growth. That steady growth from a sector leader makes NextEra Energy a no-brainer energy stock to own for the long term.
A high-quality energy portfolio to hold through the transition
The multidecade transition to cleaner energy sources will likely have lots of winners, so it makes sense to build a basket of energy stocks positioned to prosper from this megatrend. The best options include Brookfield Renewable, Clearway Energy, Enbridge, Kinder Morgan, and NextEra Energy. They're leaders in the sector, which should enable them to continue expanding their operations, earnings and dividends. Those factors make them seem likely to be winning investments over the long haul.
An index fund's expense ratio is charged annually as a percentage of your total investment. Comparing companies' price-to-earnings ratios can help determine if a stock is undervalued or overvalued. Dividends can play a huge role in retirement income.
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