High-yield energy stocks can provide diversification to your portfolio. But if you pick the right high-yielders, they can also offer stability — you just have to avoid the segments of the energy sector known for massive, commodity-driven price swings. Both Enbridge (NYSE: ENB) and Black Hills (NYSE: BKH) allow you to focus on long-term dividend payers with high yields while avoiding direct exposure to oil and natural gas.
The oil and gas industry is largely broken down into three segments. The upstream (drilling) and the downstream (chemicals and refining) are both commodity-driven and tend to be very volatile. The midstream (pipelines), however, is different. The companies here basically help transport oil and natural gas, and the products into which they get turned, around the world. They own energy infrastructure and simply charge upstream and downstream companies fees for the use of those vital energy assets.
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All in, midstream companies can be very consistent businesses, generating strong cash flows in good energy markets and bad ones. This is the story backing Enbridge’s 29-year streak of annual dividend increases (in Canadian dollars). This North American midstream giant owns assets that would be difficult, if not impossible, to replace or displace, so there’s no reason to believe that its dividend is at any risk of being cut. In fact, through the first nine months of 2024 the company’s distributable cash flow payout ratio was right in line with management’s 60% to 70% target.
Meanwhile, Enbridge has an investment-grade rated balance sheet and a highly diversified business. With assets spread across oil pipelines, natural gas pipelines, natural gas utilities, and renewable power, Enbridge is one of the most diversified midstream companies you can buy. The stock has rallied a bit in 2024, but if you are looking for a reliable high-yield stock with exposure to oil and natural gas, the 6.1% dividend yield on offer here is still one of the best choices around.
If you thought that 29 years of annual dividend increases was impressive, then the 54-year streak that Black Hills has delivered will really impress you. That puts this regulated natural gas and electric utility into the highly elite group of companies known as Dividend Kings. Black Hills has one of the longest dividend streaks in the utility sector even though most investors probably won’t know its name given its modest size. The company’s market cap is just $4.5 billion, which is a rounding error compared to the largest utilities. And yet the 4.1% yield is both high for a utility today and historically elevated for Black Hills.
Black Hills serves around 1.3 million customers in parts of Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota, and Wyoming. The regions it serves are seeing population growth that’s around three times faster than U.S. population growth. That’s a good sign for a regulated utility, which has to get rates and capital investment plans approved by the government. More customers generally means more revenues and an increased necessity for spending, which also leads to higher rates. Right now Black Hills has a $4.3 billion capital investment budget that will take the company through 2028.
That spending is expected to back this investment-grade rated utility’s long-term projections for 4% to 6% earnings growth over the long term. The dividend is likely to grow roughly along with earnings. In other words, this is a good option for conservative income investors who don’t mind owning a slow and steady tortoise.
You can easily find energy companies with higher yields than Enbridge and Black Hills. But that’s not the full story with these two stocks because you are getting financially strong and reliable dividend payers. That’s a combination that is much harder to come by on Wall Street, particularly in a sector known for volatility.
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Reuben Gregg Brewer has positions in Black Hills and Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool has a disclosure policy.
Here Are My Top 2 High-Yield Energy Stocks to Buy Now was originally published by The Motley Fool
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