The energy industry has been on fire over the past year as an improving global economy has led to high energy prices and booming profits for energy companies. And many energy companies are making so much cash that they're increasing dividends, returning cash to shareholders at a rapid rate.
Energy usage may be changing as we drive more electric vehicles and more sources of energy are renewable, but energy usage continues to go up, and there are tailwinds behind some rock-solid energy stocks. Three that I think you can hold for years are Duke Energy (DUK 0.24%), Phillips 66 (PSX -1.22%), and Brookfield Renewable (BEPC 1.95%).
1. Duke Energy
Utilities can be some of the most stable businesses in energy, and Duke Energy is one of the largest utilities in the U.S. The company owns regulated electricity and natural gas assets on the East Coast, and the fact that it's primarily in a regulated business means it generates a steady rate of return. Management is even selling commercial solar assets that don't have the same growth prospects as the core business in order to more efficiently run the business.
The chart shows that over time, the company has slowly but steadily grown revenue and increased its dividend, which currently stands at 4%. In a business like this, it's not revenue growth that we should worry about, but rather earnings per share and dividend growth trends long term.
DUK Revenue (TTM) data by YCharts
Management expects the company will be able to grow earnings between 5% and 7% per year through 2027 based on the $5.65-per-share midpoint of 2023 earnings guidance ($5.55 to $5.75). That's a steady rate of growth in a critical segment -- the energy industry.
Utilities may not be the most exciting businesses to own, but they play a critical role in our infrastructure, and that's what will keep them churning out dividends for years to come.
2. Phillips 66
The oil and gas business has become much more profitable over the past year as demand for fossil fuels rise and producers remain conservative in their investments. Phillips 66 is a beneficiary of these trends, despite the fact it doesn't make money directly on the price of oil or gas. As a refiner and marketer of products, it does well when demand for gasoline is rising.
Believe it or not, oil consumption is rising, and you can see in the chart that the past year has seen the most free cash flow of any time in the past decade.
PSX Free Cash Flow data by YCharts
I think the general trend for the oil industry is one of extracting as much value as possible. There aren't new refineries being built, capital spending on exportation is declining, and companies are more than happy generating significant free cash flow.
Phillips 66 is one of the companies doing that. With the stock trading for 7.9 times free cash flow and a 3.9% dividend yield, this is a stock you can hold for years.
3. Brookfield Renewable
On the renewable energy side of the industry, Brookfield Renewable is one of the leaders. The company buys hydro, wind, and solar energy assets with long-term contracts to sell electricity to utilities. It's essentially like buying a bond, given the fact that contracts often extend for over two decades.
As a financing company, Brookfield Renewable needs the industry to expand overall to growth, or it won't have projects to buy. This is why policy changes like the Inflation Reduction Act (IRA) in the U.S. are a huge tailwind. Management said in the Q3 2022 earnings release that the IRA "will meaningfully benefit from the Inflation Reduction Act, which provides significant upside to our underwriting."
Brookfield Renewable trades with a 4.1% dividend, and management aims to increase the payout 5% to 9% per year, with a total return target of 12% to 15%. With the tailwind of the renewable energy industry at its back, this is a company that I think will do extremely well for the foreseeable future.
Energy is a great place for dividend stocks
The energy industry isn't built on hype, but rather focuses on generating returns from the capital investments made each year. That makes the industry a great place for dividends, and these three stocks are worth holding for years as a result.
