3 Top Energy Stocks to Buy Hand Over Fist This December | The Motley Fool (2024)

Energy stocks have woefully underperformed this year. While the S&P 500 is up more than 19%, the energy stocks in that index are down by an average of 2%.

That underperformance has many energy stocks looking like relatively compelling investment opportunities these days. Enterprise Products Partners (EPD 0.24%), Kinder Morgan (KMI 0.54%), and NextEra Energy (NEE 0.85%) stand out to a few Fool.com contributors as the top ones to buy this December. Here's why they think investors should scoop up shares this month.

If you like passive income, Enterprise has you well covered

Reuben Gregg Brewer (Enterprise Products Partners): If there's one thing that gets a dividend investor's blood pumping, it's a fat yield, like the 7.5% yield on offer from Enterprise Products Partners. The only thing investors need to be careful about when looking at mouthwatering yields like that is whether they're sustainable. Enterprise's yield is very well covered.

For starters, the North American midstream giant operates a portfolio of energy infrastructure assets that would be virtually impossible to replace or replicate. Those assets are mostly fee driven as well, so the cash flows they produce are highly reliable despite the inherent volatility of oil and natural gas prices. This is why master limited partnership (MLP) Enterprise has managed to increase its distribution annually for 25 consecutive years.

But the real strength of the distribution shows up in two other ways. First, Enterprise's balance sheet is investment grade-rated. In other words, it's financially strong. Second, its distributable cash flows cover the distribution 1.7 times over. That leaves a huge amount of room for adversity before the distribution would be at risk. And even then, Enterprise could lean on its balance sheet for a little while to support the payment if it had to. There's no telling how long Enterprise's yield will be as lofty as 7.5%, so investors looking for a reliable income option should probably act sooner rather than later -- before the rest of Wall Street catches on to the story.

Flexing its flexibility

Matt DiLallo (Kinder Morgan): Kinder Morgan has spent several years shoring up its balance sheet. The natural gas pipeline giant has sold assets and used excess cash flow to reduce its debt. It has cut its debt by more than $11 billion since 2015, reducing its leverage ratio by 23%. It's on track to end this year with a leverage ratio of 4.0, well below its long-term target of 4.5.

That has given the company lots of financial flexibility. It recently found an opportunity to put some of its financial capacity to work. It agreed to buy STX Midstream from NextEra Energy Partners in a $1.8 billion deal. Kinder Morgan capitalized on the opportunity to buy a high-quality natural gas pipeline business from NextEra Energy Partners, which needs cash to redeem some maturing financing. It's getting a good deal on a highly strategic asset.

The company expects STX Midstream to be accretive to its cash flow per share. Meanwhile, it's only using a fraction of its financial capacity since the acquisition will increase its leverage ratio by 0.1 times in the near term. So it still has ample financial flexibility to make additional deals.

Kinder Morgan should also benefit from a growing slate of high-return expansion projects. It ended the third quarter with $3.8 billion of expansions under construction that should come online over the next few years. They'll supply the company with incremental income as they enter service.

Those two growth drivers should increase the company's cash flow. That will give it more money to pay dividends. Kinder Morgan has given its investors a raise for six straight years and currently offers a 6.4%-yielding payout. That combination of income and growth puts Kinder Morgan in a solid position to produce attractive total returns in 2024 and beyond.

Time to get greedy

Neha Chamaria (NextEra Energy): After plunging dramatically toward the end of September, shares of NextEra Energy have regained some ground in recent weeks. I expect the stock to maintain its momentum and believe it's a solid buy this month. That's because NextEra Energy has its growth plans in place, and some of the fears about the company appear unwarranted.

NextEra Energy stock slumped after its majority-owned limited partnership company, NextEra Energy Partners, slashed its dividend growth goal through 2026 in the wake of higher interest rates that made funding for growth difficult. Investors feared two things: NextEra Energy could be next in line to cut its growth forecast, and lower income in the form of dividends from the limited partnership could hit its bottom line.

During its most recent earnings release, though, NextEra Energy said it was confident of growing its adjusted earnings per share (EPS) by 6% to 8% through 2026 off its 2024 estimate and expects to increase its dividend annually by around 10% at least through 2024. Management even stated it would be "disappointed" if the company didn't grow at the higher end of its range through 2026. NextEra Energy expects its planned investments in its utility, Florida Power & Light (FPL), and renewable energy to drive growth. While FPL expects to invest up to $34 billion between 2022 and 2025, NextEra Energy's clean energy arm already has a humongous backlog of over 21 gigawatts.

For a company that's still growing its cash flows and dividends steadily and prioritizes a healthy balance sheet, NextEra Energy looks like the kind of company that should not only be able to navigate challenging times but also reward shareholders along the way. With the utility stock now languishing at three-year lows and yielding 3.2%, it makes for a solid long-term buy now.