2 energy shares to buy for $116 and keep forever

Energy is a basis not only for the economy, but also for modern life. This makes it a great place to look for long-term investment ideas — stocks that you can reasonably buy and expect to hold indefinitely. However, some energy companies, such as those that drill for oil and gas, can be volatile because they are affected by external factors such as the price of oil.

Instead, investors should consider energy companies such as Enbridge (NYSE: ENB) and NextEra Energy (NYSE: NEE). These companies have diverse business models, including exposure to renewable energy, which could help drive long-term growth. Both stocks offer a combination of dividend and share price potential while trading at attractive prices today.

The best part? They won’t break the bank; you can buy some of both for just over $100 right now. Here’s what you need to know.

A three-headed blue chip dividend stock

Enbridge is a Canadian energy company based in the resource-rich Oil Sands region of Alberta. The company generates about three-quarters of its profits from its midstream operations, which involve transporting oil and gas through a vast network of pipelines and storage facilities throughout North America. The pipeline business is not as sensitive to commodity prices; instead, Enbridge generates revenue based on the volume of resources flowing through its pipelines. Enbridge also operates the largest natural gas utility in North America, which sells and distributes natural gas to residents and businesses. Finally, Enbridge has a growing renewable energy business, though it currently contributes a low single-digit percentage of its profits.

The critical element in Enbridge’s business model is stability. Oil and gas are constantly flowing through Enbridge pipelines, and people use natural gas to heat their homes and water, cook food or generate electricity, regardless of how the economy is doing. These steady streams of income have helped Enbridge continue to pay shareholders a dividend and increase it for 28 consecutive years. Enbridge is also a high yielding stock; the stock is currently yielding 6.9%, but has averaged a return of 5.6% over the past decade. The payout ratio is just 65% of Enbridge’s distributable cash flow, so investors shouldn’t consider the high yield a red flag. Enbridge’s growth is more like the tortoise than the rabbit, so its dividend primarily generates investment returns.

Enbridge continually invests in large projects, which can distort earnings. Investors should treat Enbridge’s distributable cash flow as earnings and value the stock that way. The stock trades at less than 12 times Enbridge’s guided 2024 distributable cash flow per share. Management believes its cash flow will grow at a single-digit annualized rate after 2026, making today’s valuation a reasonable price given its high initial dividend yield. Investors should be able to hold and enjoy investment returns that average 10% to 12% annually over time.

The story continues

America’s largest utility and renewable energy producer

Looking for more growth? Check out NextEra, which has grown to become one of the world’s leading renewable energy producers. It is also America’s largest electric utility, serving more than 12 million people in 5.8 million accounts in Florida. NextEra Energy has been a long-term market beater because of the gradual shift away from dirty energy sources like coal to solar and wind. Right now, NextEra is a massive company with a market cap close to $160 billion.

However, significant growth is still to come in the coming decades. According to the US Department of Energy, solar and wind power accounted for only 13% of domestic electricity generated in 2022, which will increase in the coming years. In addition, America’s broader electricity needs are also growing. Research from Statista estimates that America’s overall electricity needs will increase by 27% between now and 2050. Ultimately, NextEra should benefit from its location in Florida. Government data indicates that Florida’s already colossal population and economy are among the fastest growing.

Investors today enjoy a dividend yielding 2.6%; management has been raising it for 30 years and more. These overall energy trends should continue to fuel growth and investor returns. Analysts expect the company to grow earnings at an annualized rate of 8% over the next three to five years, which is exactly on par with NextEra’s earnings growth over the past 15 years. The growth won’t knock your socks off, but its consistency can make you rich. The stock trades at a P/E ratio of 23, below its 10-year average of 28, making it worth finding and holding.

Should you invest $1,000 in Enbridge right now?

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Enbridge and NextEra Energy. The Motley Fool has a disclosure policy.

2 Energy Stocks to Buy for $116 and Hold Forever was originally published by The Motley Fool