The Smartest Energy Stocks to Buy With $1,000 Right Now

The energy industry is experiencing a bit of a renaissance. Electricity demand is expected to surge in the coming years, fueled by a multitude of catalysts, including the electrification of the transportation sector and AI data centers. This anticipated uptick in power demand should benefit companies that produce, transport, and distribute natural gas.

The smartest way to play this coming surge is investing in master limited partnerships (MLPs) with meaningful gas infrastructure operations. Since MLPs currently trade at lower valuations than pipeline corporations, they offer higher yields and total return potential.

More attractive options

The market has been bidding up gas pipeline companies this year, fueled by the expected surge in gas demand in the coming years. Shares of leading pipeline corporations Kinder Morgan, Oneok, and Williams have rocketed 60% or more over the past year. While MLPs have also rallied, they haven't risen quite as sharply as their corporate peers. Enterprise Products Partners (NYSE: EPD), Energy Transfer (NYSE: ET), and MPLX (NYSE: MPLX) have risen between 30% and 40% over the past year and trade at relatively lower valuations:

KMI EV to EBITDA (Forward) data by YCharts

Those lower valuations are a big reason MLPs offer much higher income yields these days. Enterprise Products Partners' distribution yields more than 6%, while Energy Transfer's is 6.5%, and MLPX's payout is 7.5%. That compares with their corporate peers' dividend yields in the 3% to 4% range. A $1,000 investment into one of these MLPs would produce more than $60 of income each year, nearly double the $30 to $40 of dividend income an investor would collect from a similar investment in a pipeline corporation.

There is one caveat: MLPs send their investors a Schedule K-1 Federal Tax Form each year, while pipeline corporations send a Form 1099-DIV. Schedule K-1s can complicate an investor's tax filing, which is why many avoid these entities. However, MLPs have attractive tax advantages, which make their after-tax income yields even higher than those of pipeline corporations.

Plenty of growth is coming down the pipeline

A higher income stream is only part of the draw of these MLPs. They also have strong growth prospects similar to those of their corporate peers.

For example, Enterprise Products Partners currently has $6.9 billion of major projects under construction. These projects include several natural gas processing plants and gathering system expansions. It also has projects to support the continued demand growth for natural gas liquids and refined products. These projects should enter service through 2026, supporting future cash flow growth and capital returns to investors. The MLP has increased its distribution for 26 straight years, which seems highly likely to continue.

MLPX has several gas-related infrastructure projects under way. The company and its partners approved the construction of the Blackcomb and Rio Bravo pipelines, which will transport gas from the Permian to domestic and export markets when they enter commercial service in the second half of 2026. It also has several additional gas processing plants under construction that will come online through the second half of 2026. These projects will give the MLP more fuel to increase its high-yielding distribution. MPLX recently gave investors a 12.5% raise and has increased its payout at a double-digit rate in each of the last three years.

Energy Transfer believes it's one of the better-positioned midstream companies to capitalize on the AI power boom. The company is seeing a surge in interest across its footprint for additional gas capacity. That should support higher utilization of its existing gas pipeline systems and opportunities to expand its capacity. Gas pipelines are only part of Energy Transfer's growth story. The MLP has several other expansion projects under construction or in development, including export terminals, gas-fired power plants, and some lower-carbon energy opportunities. Those projects support the company's view that it can grow its high-yielding distribution by 3% to 5% per year.

MLPs offer compelling total return potential

MLPs have underperformed their corporate peers this year and now trade at lower valuations and higher dividend yields despite equally robust growth prospects. That makes them look like the smartest stocks in the energy sector to buy right now.

Should you invest $1,000 in Enterprise Products Partners right now?

Before you buy stock in Enterprise Products Partners, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Enterprise Products Partners wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $847,211!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of November 25, 2024

Matt DiLallo has positions in Energy Transfer, Enterprise Products Partners, and Kinder Morgan. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool recommends Enterprise Products Partners and Oneok. The Motley Fool has a disclosure policy.