Buy These 3 High-Yield Energy Stocks Now and Let the Dividends Compound Forever
Key Points
Chevron should easily extend its streak of 39 consecutive years of dividend increases.
Energy Transfer pays an especially juicy distribution that should continue growing.
Enterprise Products Partners offers an attractive distribution and a rock-solid balance sheet to back it up.
- 10 stocks we like better than Chevron ›
What's better than a juicy dividend? A juicy dividend that grows. And what's better than a juicy dividend that grows? A juicy dividend that grows, is reinvested, and generates even more income for you over time.
The energy sector is one of the best places to look to find stocks that offer such dividends. Here are three high-yield energy stocks to buy now and let the dividends compound forever.
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1. Chevron
Chevron (NYSE: CVX) ranks as the world's third-largest energy company. It operates an industry-leading upstream portfolio with the highest natural gas production and an integrated refining and marketing business with the top U.S. retail market share. The company has also expanded into renewable energy and carbon capture technologies.
This energy giant has been a longtime favorite for income investors for good reason. Chevron has increased its dividend for 39 consecutive years. Its forward dividend yield is roughly 3.9%.
Chevron shouldn't have any problems keeping its streak of dividend hikes going. The company expects both earnings per share and adjusted free cash flow to grow by an average of at least 10% per year. When earnings and free cash flow rise, dividends are likely to follow suit.
Investors also benefit from what some call an "invisible dividend" with Chevron -- stock buybacks. The oil and gas leader has repurchased shares in 18 of the last 22 years. Management plans to buy back between 3% and 6% of its outstanding shares annually.
2. Energy Transfer
Energy Transfer (NYSE: ET) operates over 144,000 miles of pipeline that span much of the U.S. These pipelines transport natural gas, natural gas liquids (NGLs), crude oil, and refined products. In addition, Energy Transfer owns natural gas processing plants, storage facilities, and terminals.
If you're seeking an especially lofty yield, this pipeline stock should be just the ticket. Energy Transfer pays a distribution that yields 6.9%.
The limited partnership reduced its distributions during the COVID-19 pandemic. However, this was a blip in an otherwise exemplary track record of distribution growth. Energy Transfer's distribution is now higher than it was before the pandemic. More importantly, the company appears well-positioned to continue expanding its distribution.
Growing demand for natural gas is arguably the biggest tailwind for Energy Transfer. In particular, data centers that host artificial intelligence (AI) applications require massive amounts of electricity. Natural gas is an ideal fuel for the power plants serving these data centers. Unsurprisingly, Energy Transfer has signed multiple major deals to supply natural gas to technology companies that operate AI data centers.
3. Enterprise Products Partners
Enterprise Products Partners (NYSE: EPD) is another midstream energy leader that's a great pick for income investors. This limited partnership operates over 50,000 miles of pipeline, with NGLs generating 55% of its gross margin. Enterprise also owns liquids storage facilities, fractionators, natural gas processing trains, and deepwater docks.
This stock is a Dividend Champion, increasing its distribution for 27 consecutive years. Enterprise Products Partners' distribution yield tops 5.7%, a level that should appeal to nearly every income investor.
One of the primary reasons why midstream companies could be forced to cut their distributions is heavy debt loads. Enterprise Products Partners doesn't have much to worry about on this front, thanks to its rock-solid balance sheet. It has around $3.3 billion of liquidity. The company boasts the highest credit rating in the entire midstream energy industry. Enterprise's leverage ratio is a relatively low 3.2x.
Like Energy Transfer, Enterprise Products Partners is well-positioned to benefit from rising natural gas demand from AI data centers. It's also poised to profit from the growth in U.S. oil and gas exports to other countries.
Should you buy stock in Chevron right now?
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Keith Speights has positions in Chevron, Energy Transfer, and Enterprise Products Partners. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
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