This year has been absolutely brutal for income investors. Hundreds of publicly traded companies cut or reduced their payouts because of the impact COVID-19 had on their operations. One of the hardest-hit sectors was energy, as dividend payments tumbled along with energy prices.
However, not all energy-powered dividends are at risk of a reduction. Three standout dividend stocks in the sector are Enbridge (NYSE: ENB), NextEra Energy (NYSE: NEE), and Clearway Energy (NYSE: CWEN)(NYSE: CWEN.A). Here's why they offer some of the safest payouts in the energy industry these days.
An elite energy dividend
Enbridge has one of the most durable dividends in the energy sector. The Canadian pipeline giant has paid a dividend for more than 65 years, including increasing it in each of the last 25 years. That growth streak puts it in an elite class.
That payout -- which currently yields an attractive 7.6% -- is on rock-solid ground because Enbridge has a strong investment-grade balance sheet backed by a leverage ratio at the low-end of its target range. On top of that, it generates durable cash flow, thanks to government-regulated rates and fee-based contracts. That low-risk business model has it on track to achieve its full-year cash flow forecast despite all the turbulence in the oil market.
Meanwhile, it only pays out 65% of its cash flow to support its high-yielding dividend, a conservative level for a pipeline company. That enables it to retain cash to invest in expansion projects, which give it the fuel to keep increasing its dividend.
A sector-leading dividend by all measures
NextEra Energy has one of the strongest financial profiles in the utility sector. It's tied for having the highest credit ratings among publicly traded electric utility holding companies. On top of that, it only pays out 60% of its earnings to support its 2.2%-yielding dividend, comfortably below the 65% average.
Given its financial strength and growth prospects, NextEra expects to increase its dividend by around 10% per year through at least 2022. That's a well-above-average rate in the utility sector, making it a great option for investors seeking low-risk income growth.
A safe dividend powered by clean energy
Clearway Energy generates very stable cash flow, thanks to the contract profile of its clean power assets. The company currently expects to produce about $1.56 per share of cash this year, which implies a comfortable 54% payout ratio on its 3.7%-yielding dividend. Meanwhile, that payout ratio is on track to fall to 49% in the coming year as it benefits from recently secured wind-power acquisitions.
The clean-energy producer complements its conservative cash flow profile with a healthy balance sheet. While it doesn't have an investment-grade rating, its credit metrics are in line with its target, and it has lots of liquidity (cash and available borrowing capacity). Because of that, it has the financial flexibility to make investments that grow its cash flow, giving it the power to increase its dividend.
It also has strategic relationships with a renewable-energy project developer and a private equity fund to support its growth via both funding and investment opportunities. Those factors put Clearway's current payout on one of the most sustainable foundations in the renewable-energy sector.
These dividends can withstand downturns
Several energy companies had to slash or suspend their dividends this year as cracks in their financial foundations began to emerge. However, many other energy dividends have proven their durability during this year's downturn, including the payouts of Enbridge, NextEra Energy, and Clearway Energy. Because of that, they stand out as three of the safest dividends in the energy sector.
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Matthew DiLallo owns shares of Clearway Energy, Inc., Enbridge, and NextEra Energy. The Motley Fool owns shares of and recommends Enbridge. The Motley Fool recommends NextEra Energy. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.