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3 Top Energy Stocks to Buy in December

Motley Fool - Wed Dec 6, 2023

The energy sector encompasses a lot of different industries, and every investor should probably have a little exposure somewhere along the line. If you are looking at this broad area as December gets underway, you might want to consider Chevron(NYSE: CVX), Duke Energy(NYSE: DUK), and Brookfield Renewable(NYSE: BEP)(NYSE: BEPC).

Here's a quick look at why these three energy stocks are potential buys this month.

1. Chevron is built for safety

Despite the volatile nature of oil and natural gas prices, Chevron has managed to increase its dividend annually for 36 consecutive years. There are two big reasons for this. First, the company is an integrated energy major, which means its business spans from the upstream (drilling) through the midstream (pipelines) and all the way to the downstream (refining and chemicals). Having exposure to all aspects of the energy sector helps to smooth out the inherent ups and downs of the industry because some areas usually benefit while others are suffering.

That's important, but the bigger story is probably Chevron's balance sheet. With a debt-to-equity ratio of roughly 0.12 times, it has the strongest finances of any of its closest peers. Essentially, during the lean times, it can take on debt to keep funding its business and dividend while it waits for better days. When energy prices recover, as they always have historically, the company reduces its leverage to prepare for the next downturn. With a dividend yield of 4.1%, even the most conservative dividend investors should probably feel comfortable owning Chevron.

2. Duke Energy has managed to get even more boring

Duke Energy is one of the largest regulated utilities in the United States. What's interesting here today is that the company recently sold a small contracted renewable power business that it had built up. While driven by long-term contracts, contracted renewable power assets aren't as reliable as regulated assets. Duke's regulated operations have monopolies in the regions they serve and, in return, must get their rates and capital investment plans approved by the government. That limits growth, but it also tends to lead to a highly reliable business with slow and steady returns.

The dividend yield today is around 4.3%, and it has been increased annually for 19 consecutive years. Don't expect rapid dividend growth, but management has a clear line of sight for the future. It currently has a capital spending plan of around $65 billion (including a lot of clean energy investment) over the next five years that should drive earnings growth of between 5% and 7% a year through 2027. What investors will like about this is that the spending is largely regulator-approved and should take place no matter what is happening on Wall Street. So the growth management expects should be fairly reliable.

3. Brookfield Renewable is all in on clean energy

Duke Energy happened to have sold its contract clean energy business to Brookfield Renewable, the last stock on this list. Brookfield Renewable is a pure-play renewable power investment with around 32 gigawatts of power in its globally diversified clean energy portfolio. It is one of the most prominent players in the clean energy space thanks to the fact that it is backed by investment powerhouse Brookfield Asset Management(NYSE: BAM), which often helps to finance the deals it inks. But the really exciting opportunity is the growth built into the portfolio via the company's 130-plus gigawatt backlog of projects it has yet to build. That backlog should support growth for years to come.

There are two ways to invest in Brookfield Renewable that both represent the same entity -- Brookfield Renewable Partners and Brookfield Renewable Corp. As the names suggest, one is a partnership and the other a normal corporation. Brookfield Renewable Corp. was created so that entities unable to invest in partnerships (like pension funds) could invest, broadening Brookfield Renewable's access to capital. The partnership's yield is 5.2%, while the corporation's yield is 4.8%, largely because there is more demand for this structure. Both will provide high yield and clean energy exposure -- the partnership (the entity with the longer history) has increased its distribution annually for more than a decade.

A broad set of energy opportunities

Energy is a bit of a catch-all term, encompassing everything from oil drillers to electricity providers. There are good options for investors throughout the sector in December. Chevron is a rock-solid oil and natural gas stock. Duke is a regulated utility with a solid list of capital investment projects to build. And Brookfield Renewable is an expanding renewable power company with a massive backlog to complete. And all three have attractive yields above 4%.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Brookfield Asset Management and Brookfield Renewable. The Motley Fool recommends Brookfield Renewable Partners, Chevron, and Duke Energy. The Motley Fool has a disclosure policy.

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