The energy sector is an important part of the global economy. It provides the fuel and the energy needed for the growth of and into developed nations. As such, it’s one of the areas that come with massive investor interest.
However, investing in energy can prove to be pretty risky. Economic headwinds combined with supply-and-demand uncertainties can make it difficult to choose strong investments that are likely to grow over time.
Nonetheless, making the right moves when investing in energy stocks can be an incredibly fruitful endeavor. For example, in 1990, Exxon Mobil stock traded at around $12 per share. By January of 2020, the stock was trading at above $65 per share after becoming one of the key pieces to the energy infrastructure puzzle in the United States and around the world.
If you had invested $10,000 in Exxon Mobil in 1990, your investment would be worth more than $54,100 today. Not to mention, you would have received even more money in dividend payments, which works out to an additional 5% return per year according to Blue Harbinger Investing Research. Depending on which year in that span you’re talking about, that would have accounted for between $500 and $2,700 per year in added dividend income while enjoying one of the best dividend yields on the market.
Those kinds of returns are nothing to sneeze at. So it’s not surprising to see that so many investors are looking to try their hand at investing in energy stocks.
Pro tip: You can earn a free share of stock (up to $200 value) when you open a new trading account from Robinhood. With Robinhood, you can customize your portfolio with stocks and ETFs, plus you can invest in fractional shares. Sign up for Robinhood.
Best Energy Stocks to Buy Right Now
As with any investment made in any sector, it’s always a good idea to do your research and find what you believe to be the stocks with the highest potential to generate returns. Some of the best energy stocks you may want to start researching are listed below.
1. Exxon Mobil Corporation (NYSE: XOM)
Exxon Mobil has had a tough run in 2020. Its stock price has fallen more than 50% since the open of the year owing to demand concerns surrounding COVID-19 shutdowns and the resulting oil supply surplus. Nonetheless, these recent declines could be an opportunity to get in on strong potential gains in the future.
However, the fact that a stock is trading near its lows is never a good reason to buy it. After all, stocks trade on lows all the time just before a business enters bankruptcy, goes out of business, or announces reverse stock splits in an attempt to comply with the requirements of the exchange they’re traded on.
Although Exxon Mobil’s stock is down as oil prices continue to provide little support, the company has shown a strong display of financial strength, continuing to pay investors dividends. In fact, the stock comes with one of the strongest dividend yields in the space. Moreover, many believe the company will make a run for the top in the long run thanks to its diverse clean energy portfolio.
There’s no doubt Exxon Mobil isn’t giving up its core traditional crude oil, natural gas, and fuel business any time soon. The company owns one of the largest chains of consumer gas stations, several oil refineries, and other companies that meet energy needs using traditional fuel sources. However, knowing that the world is looking for more clean energy options, the company is making massive investments in this space as well.
In fact, Exxon Mobil is one of the leaders in the world of carbon capture and storage (CCS) technology. Carbon capture technology has the potential to capture about 90% of CO2 emissions from the use of crude oil in energy, ultimately making energy production a much cleaner process. The captured carbon can then be used in various environmentally positive ways. According to Vox, CO2 generated from CCS technology is used in applications including the production of more sustainable concrete and algae-based feedstock.
As of July 2020, Exxon Mobil controls about a quarter of the CCS industry, making it the largest player in a section of the clean energy industry that’s beginning to gain real interest.
With Exxon Mobil’s position as a leader in traditional energy and the CCS corner of the clean energy sector along with its ability to maintain a strong dividend yield in the face of the coronavirus pandemic, the company is already pretty impressive. Add in the discount to its share price caused by COVID-19-related declines and the potential for a rebound as oil prices recover, and the potential for tremendous gains becomes hard to ignore.
2. FuelCell Energy, Inc. (NASDAQ: FCEL)
FuelCell Energy is a small, lesser-known company. As a mid-cap stock, it’s the most risky investment opportunity on this list. Notwithstanding the risks, it’s also the stock that may have the largest long-run potential to generate serious gains as a cornerstone in clean energy.
FuelCell Energy is the developer of proprietary fuel-cell technology designed to deliver clean energy at efficient costs. In fact, it’s this technology that lies at the heart of the CSS technology Exxon Mobil is investing hundreds of millions of dollars in.
FuelCell Energy is a key beneficiary of these investments. It started a collaboration with Exxon Mobil several years ago, which is clearly going well. The collaboration has already contributed tens of millions of dollars to FuelCell’s balance sheet and will continue to do so in the future.
In December of 2019, FuelCell Energy announced that it expanded its relationship with Exxon Mobil with regard to the development and use of next-generation carbon capture technology. As a result, FuelCell now has access to an additional $60 million in revenue over the course of two years.
As of July 2020, the company traded with a market cap of around $600 million. So, this contract represented revenues equal to around 10% of the company’s entire value. Fast forward a few months, and the clean energy stock is trading with a market cap of around $720 million as of October 2020.
The magnitude of this deal is already impressive. And when you consider the fact that Exxon Mobil brought Princeton researchers into the carbon capture team, and that all members of the collaboration will benefit from the production of new technologies, it seems as though FuelCell Energy is quickly becoming a cornerstone in the clean energy industry.
To add icing to the cake, the company recently received a U.S. Department of Energy Award worth $8 million. In exchange, the company will further research a technology that has the potential to produce hydrogen, a key component needed to generate energy with fuel cell technology. So, not only is the company innovating in terms of the clean energy-producing technology in itself, but it is working to create a supply chain that will make it a cornerstone in the fuel cell industry.
Of course, it’s important to consider the risks with smaller-cap stocks. In this case, you should be aware of the following:
- FuelCell Energy Doesn’t Generate Profits Yet. Like many stocks with market caps under $1 billion, FuelCell Energy currently operates at a loss and is projected to continue to do so for at least the next year. That means the company may have to move forward with transactions that dilute the value of shares and lead to stock declines in the future as it continues to perfect its clean energy technology and sales process.
- Small Market Caps Are Volatile. The smaller the market capitalization of the stock you’re watching, the more volatility you’re likely to see. While FuelCell Energy has grown out of penny stock territory, it’s not far from it. As a result, the relatively low market cap of the stock means that it is much more volatile than blue chip stocks, which could present a challenge to beginner investors when it comes to entry and exit timing.
- Fuel-Cell Technology Is Highly Speculative. Fuel-cell technology is relatively new. While the concept has been proven, and the technology is in use today, FuelCell Energy is by no means the go-to source for clean energy. Investing in the company is a bet that not only will carbon capture technology become a major part of the clean energy industry, but that FuelCell Energy will be one of the leaders of this subsector.
If you’re willing to take on the unique risks that come with FuelCell Energy, the stock represents a high-risk, high-reward opportunity to get in on the ground floor of what may become a multibillion-dollar industry. Not to mention the wide swings in valuation in the short term make great trading opportunities for the investor with strong technical analysis skills.
3. Chevron Corporate (NYSE: CVX)
Chevron is another household name in the energy industry. Best known for its massive chain of gas stations, the company is among the top in the energy sector, ranking with the likes of Exxon Mobil. Like Exxon Mobil, Chevron has deep roots in the production of crude oil, liquid natural gas (LNG), and refined fuels.
As with Exxon Mobil, Chevron shows no intention to give up traditional energy business. However, when it comes to future energy consumption demand, the company is preparing for the world of clean energy in a big way.
So far, Chevron has invested millions of dollars into several key areas of clean energy, including:
- Biofuels. Chevron is an important player in the biofuels game. Not only does the company create biofuels from its own feedstocks, but it also partners with several biofuel technology companies, service providers, and producers as it looks to corner this subsector of the energy industry. The company even has an agreement with waste disposal company Waste Management to refine the trash it collects to create biofuels to run trash pickup service vehicles, making it so that these trucks are powered by renewable energy.
- Solar. Chevron is in the process of evaluating solar technologies at three different sites in California. Its research has led to the company signing a 20-year potential term power purchase agreement with SunPower, a leader in solar solutions, to power Chevron’s Lost Hills Oil Field.
- Wind. Chevron’s involvement in wind energy is impressive, to say the least. The company commissioned what is now known as the Casper Wind Farm in 2009. Today, the 16.5-megawatt facility generates enough power to provide energy to 13,000 homes in the United States.
- Geothermal. Finally, Chevron entered into a joint venture involving a 49-megawatt geothermal facility in California. The facility produces enough energy to power about 40,000 homes.
Unfortunately, another similarity Chevron shares with Exxon Mobil is the fact that both stocks have seen significant declines as a result of the coronavirus pandemic. Also like its peer, while the company continues to invest in clean energy infrastructure, it also continues to show investor appreciation with a strong dividend yield, even in the face of the pandemic.
With the company’s solid foundation as a traditional energy play and its aggressive expansion into the renewable energy sector, Chevron stock is one worth considering.
Pro tip: If you’re going to add energy stocks to your portfolio, make sure you choose the best possible companies. Stock screeners can help you narrow down the choices to companies that meet your requirements. Learn more about our favorite stock screeners.
4. NextEra Energy Inc (NYSE: NEE)
NextEra Energy may not be a household name, but it powers more households than any other publicly traded utility company in the world. The company owns names like Florida Power and Light and Gulf Power Company, providing electricity to 5.5 million and 428,000 customers respectively. These are just two of the company’s several utility provider subsidiaries that serve customers from big cities to rural towns. The company’s role in energy infrastructure is jaw dropping.
According to CSIMarket, NextEra controls about 12.7% of the energy subsector of the United States utility market. There’s a strong chance you or one of your friends, family members, or acquaintances buys their energy from NextEra Energy.
NextEra Energy has also stayed far ahead of its competitors when it comes to the clean energy trend. Due to the company’s early adoption and massive investments in clean energy, it’s currently the largest generator of solar and wind energy in the world.
Impressively, while NextEra Energy is among the 10 largest energy companies in the world, it is the only company that can claim that title which also isn’t involved in the traditional crude oil and gas industry — yet another source of validation that the company is doing incredibly valuable work.
Finally, NextEra Energy is one of few energy companies that are shielded from COVID-19 headwinds. As a utility company without reliance on oil, it has a unique advantage. As consumers stay home during and after lockdowns for their safety, they are consuming more power. In fact, NextEra Energy’s management has made multiple statements suggesting that if the company doesn’t produce earnings at the high end of its guidance, it will be upset. As a result of this strength, it is one of the few energy stocks that is trading above pre-pandemic highs.
While Next Energy’s dividend yield is relatively low compared to other energy stocks, the company has continued to pay dividends to investors throughout the COVID-19 pandemic. Moreover, the continued investments the company is making into clean energy infrastructure are likely far more valuable than a stronger current dividend yield.
All in all, in the long run, NextEra Energy stock is likely to continue doing what it does best — producing strong revenue, earnings, and gains for investors.
5. Kinder Morgan (NYSE: KMI)
Kinder Morgan is one of the largest energy infrastructure companies in the world. While the company isn’t a producer of crude oil, liquid natural gas, or other traditional energy products, it is important in the transportation and storage of these products.
The company owns around 85,000 miles of pipeline and 152 terminals that transport natural gas, crude oil, refined oil products, carbon dioxide, and other products that support the energy industry as it’s known today.
Unfortunately, although Kinder Morgan doesn’t produce energy-related commodities, its heavy involvement in the sector means that it has also been dealt a heavy blow as COVID-19 brought down commodity prices. Nonetheless, the company seems to be doing all the right things in order to weather the storm.
In order to shield itself from the economic impact of the COVID-19 pandemic, Kinder Morgan scaled back expansion efforts by 30%. Ultimately, this will help the company maintain a strong balance sheet and keep debt to a minimum — something that every stock in the energy sector should be focused on at the moment.
Although Kinder Morgan has done a great job of reducing expenses, expansion hasn’t come to a complete halt. The company continues to move forward with the 430-mile Permian Highway Pipeline Project in the Permian Basin in the southwestern U.S. for the transportation of liquified natural gas. At last update, the Permian Basin pipeline was 79% complete.
As a result of the company’s smart financial decisions and continued strength, Kinder Morgan hasn’t just maintained an impressive dividend throughout the pandemic; it recently announced that it would be increasing its dividend payments, giving it one of the strongest dividend yields in the energy industry.
The company is also making important moves to clean up its act, so to speak. Although Kinder Morgan is heavily focused on traditional energy, the company is beginning to focus its pipelines toward clean energy products like renewable natural gas and hydrogen. As the world pushes toward clean energy, Kinder Morgan will not be left behind.
With a strong history of leadership in the energy sector, unmatched energy infrastructure, impeccable financial stability, and a shift toward clean energy, Kinder Morgan one of the most impressive energy stock picks out there. Add in a best-in-class dividend yield and this stock is one that’s hard to ignore.
Investing in the energy sector can be risky, especially as the energy industry goes through a clean energy overhaul. Nonetheless, making the right moves in the space can lead to strong gains.
When investing in the energy sector, it’s important to consider the shift from traditional power to renewable, environmentally friendly energy that’s taking place. The companies with the most potential are those that have a proven track record of growth and are consistently working to transition to low-cost energy alternatives.
Do you invest in the energy sector? What are your favorite energy stocks?
Disclosure: The author currently has no positions in any stock mentioned herein nor any intention to hold any positions within the next 72 hours. The views expressed are those of the author of the article and not necessarily those of other members of the Money Crashers team or Money Crashers as a whole. This article was written by Joshua Rodriguez, who shared his honest opinion of the companies mentioned. However, this article should not be viewed as a solicitation to purchase shares in any security and should only be used for entertainment and informational purposes. Investors should consult a financial advisor or do their own due diligence before making any investment decision.