The energy sector currently clocks in with the highest dividend yield in the S&P 500 at around 4%. That's more than double the index's current 1.8% yield. Many energy stocks offer even higher dividend yields, making the sector attractive for those seeking to generate some passive income.
Three energy stocks that currently pay very high-yielding dividends are Devon Energy(NYSE: DVN), Enbridge(NYSE: ENB), and Atlantica Sustainable Infrastructure(NASDAQ: AY). They can turn a $1,000 investment into a lucrative passive income stream.
The fuel to continue paying sizable dividends
Devon Energy launched the oil industry's first fixed-plus-variable dividend framework last year. The oil producer makes fixed base quarterly dividend payments that it can sustain at lower oil prices. In addition, Devon pays a variable dividend of up to 50% of its free cash flow each quarter.
The company most recently paid a fixed-plus-variable dividend of $1.55 per share. That implies an 8.6% annualized dividend yield at Devon's recent share price of around $72.25. At that rate, A $1,000 investment in Devon would produce about $86 of annual passive income. The most recent dividend was 22% higher than the prior payment, which included a 13% ($0.02 per share) increase in the base level.
While Devon Energy's free cash flow -- and thus variable dividend payments -- will rise and fall with oil prices, the company has been using the excess cash it retains to enhance its ability to generate free cash. Devon has made two acquisitions of cash-gushing oil properties this year, which should enable it to produce more free cash flow that it can use to pay dividends in the future.
A steadily growing income stream
Enbridge built its business to pay dividends. The company has a low-risk pipeline-utility business model. It generates very steady cash flow backed by long-term contracts and government-regulated rate structures. That gives it the funds to support its 7.2%-yielding dividend, which could turn a $1,000 investment into a $72 annual passive income stream.
Enbridge only pays out about 65% of its stable cash flow via the dividend. That provides it with a nice cushion while allowing it to retain cash to fund its continued expansion. Enbridge also has a strong investment-grade balance sheet, giving it additional flexibility to finance growth.
The energy infrastructure company currently has the funding capacity and secured capital backlog of utility, pipeline, and renewable energy projects to support 5% to 7% annual growth in its cash flow per share through at least 2024. Meanwhile, it has a growing list of projects under construction and in development to fuel growth over the longer term. That should give Enbridge the power to continue growing its dividend, something it has done for the last 27 straight years.
A sustainable income stream
Atlantica Sustainable Infrastructure operates a diversified portfolio of sustainable infrastructure assets. It owns renewable energy generating facilities, electricity transmission lines, natural gas plants, and water desalinization facilities. These assets generate very stable cash flow backed by long-term contracts and government-regulated rate structures. That gives Atlantica the funds to support a dividend that currently yields 6.9%.
The company has steadily expanded its portfolio by acquiring additional cash-flowing infrastructure assets focused on the sustainability theme. As of the end of the second quarter, the company had lined up $160 million to $180 million of new investments. These included investing $102 million to buy a 63-mile electricity transmission line in Chile and two solar energy portfolios in Italy. It also agreed to invest in several solar energy facilities currently under construction. These new additions will help grow its cash flow in the future, which should give Atlantica the power to continue growing its dividend.
Atlantica has lots of liquidity to continue funding new investments. Meanwhile, it has many growth drivers, including expanding existing assets, completing development projects, and making acquisitions. Those future investments will further support Atlantica's ability to sustain and grow its high-yielding dividend.
High-powered dividends
The energy sector is a great place to score a big-time dividend yield these days. Investors have many options, including Devon Energy's big-time oil-fueled variable dividend, Enbridge's steadily rising payout, and Atlantica's sustainable dividend. They can each turn a $1,000 investment into an attractive passive income stream.
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Matthew DiLallo has positions in Atlantica Sustainable Infrastructure and Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool has a disclosure policy.
