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The energy sector can be a great source of durable passive income if you know where to look. While commodity price volatility can affect the cash flows of many energy companies, others have business models designed to mute the impact of that volatility on their earnings, so they can generate steadier cash flow to help support their growing dividends.
Enbridge (NYSE: ENB) and Brookfield Renewable (NYSE: BEPC)(NYSE: BEP) have been dividend stalwarts in the energy sector over the decades. They're in strong positions to continue paying high-yielding and steadily rising dividends in the future. That makes them great energy stocks to buy for passive income right now.
Ample fuel to continue growing its payout
Enbridge has paid dividends for more than 70 years. This will mark the 30th consecutive year it has increased its dividend. Enbridge has grown its payout at a 9% compound annual rate over the past three decades, including 3.1% this year. The Canadian pipeline and utility company's dividend currently yields an attractive 5.9%.
The energy company backs its high-yielding payout with a very low-risk financial profile. About 98% of the company's earnings come from stable cost-of-service or contracted assets. Meanwhile, the company pays a reasonable 60% to 70% of its stable cash flow in dividends. Enbridge also has a strong investment-grade balance sheet with a leverage ratio trending toward the low end of its target range.
The company's conservative financial profile puts its dividend on a very sustainable foundation. It also provides Enbridge with lots of financial flexibility to expand its energy infrastructure operations. It currently has a multibillion-dollar backlog of commercially secured capital projects under construction that should enter service through 2029. These projects primarily support lower carbon energy, like new natural gas pipelines, natural gas utility expansions, and renewable energy projects.
That backlog provides Enbridge with lots of visibility into its growth potential. It expects to grow its cash flow per share at a 3% compound annual rate through 2026 and by around 5% per year after that. This growth should support dividend increases in the 3% to 5% annual range.
Powerful growth drivers
Brookfield Renewable has grown its dividend by a 6% compound annual rate since 2001. Meanwhile, this year marked the 14th straight year that Brookfield Renewable has increased its dividend by at least 5%. The leading global renewable energy producer's dividend currently yields 5.5%.
That high-yielding payout is also on a very sustainable foundation. Brookfield Renewable produces very stable cash flow because it sells the bulk of the power it produces under long-term power purchase agreements (PPAs) with utilities and large corporate customers. Since most of those PPAs link rates to inflation, its large power generation portfolio produces stable and growing cash flow of about 2% to 3% annually.