1 Energy Stock to Buy Hand Over Fist and 1 to Avoid

The energy sector outperformed the market. However, within the sector, there is a stock to buy and a stock to avoid.

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The supply chain disruption has made oil and natural gas a hot commodity, putting oil stocks on a cyclical uptrend. An oil company like Suncor Energy (TSX:SU) can sell its produce at the market rate (around US$80), which is higher than the average US$65/barrel and make windfall gains as the cost of production remains low. But should you buy a cyclical stock at its high?

An energy stock to avoid

It is better to avoid buying it at $50 and above price as the stock may not be able to reach this price point for a long time if it begins to fall in a cyclical downtrend. No matter how confident you are of making a quick trade, timing the market is impossible. Even if you want to earn short-term money from this stock, buy it when the stock falls to its normal trading price of $45.

At the $45 price point, you can lock in a higher yield of 4.8%. Moreover, the downside risk will be lower, and the upside potential will be higher. As the interest rate trend is about to reverse later this year, the focus will shift to growth stocks. Instead of risking your money in oil stocks, you can risk it on a tech stock like BlackBerry, which could surge as car sales revive.

Automotive is a cyclical industry, and it is currently in a downtrend. You can book profit from the oil uptrend and invest the money in the automotive downtrend. When the cycle shifts, the auto stocks will surge, growing your money significantly.

An energy stock to buy hand over fist

Not all energy stocks are as risky or cyclical as Suncor. If you look at the overall supply chain, the energy infrastructure stocks are relatively stable and get regular income irrespective of the oil and gas prices. Their business model is low-risk as they trade stability for high returns.

Enbridge (TSX:ENB) has the largest pipeline infrastructure in North America, and it is relevant for the U.S. depends on Canada for a significant portion of its oil and gas needs. As the energy industry transitions towards greener alternatives, Enbridge is increasing its exposure to liquified natural gas (LNG). It is looking to tap a 20% share in the North American LNG exports.

The disruption in the supply chain of oil and gas can help Enbridge add a new source of income: LNG exports. Moreover, its overall size will increase as it completes the $19 billion acquisition of three U.S. gas utilities, adding another revenue source. Once the integration is over and the increased debt is normalized, the company will increase its dividend-growth rate to 5% by 2027 from 3%.

Enbridge is a range-bound stock that hovers between $45 and $55. You could consider buying it at a price below $50, as you can lock in a 7.5% dividend yield.

What can you expect from Enbridge?

Enbridge is a stock that will stay relevant even 50 years from now. It is transitioning with the energy industry. And the pipeline infrastructure it has built over the years will appreciate as environmental concerns have made building pipelines difficult.

A $10,000 investment today will buy you 204 shares of Enbridge, which will give you $746 in annual dividends. In 10 years, this annual payout could grow to $1,170 if Enbridge continues to grow its dividend by 3% by 2026 and 5% from 2027 onwards. The company’s history shows that it has met its target most of the time.  

Instead of $10,000, you invest $3,000 annually at $50/share for the next 10 years. At the end of 2034, you could have 661 shares that pay $3,790 in annual dividends on a $30,000 investment.

It is this predictability that makes Enbridge stocks buy hand over fist. You can use it to recoup losses from other stocks, plan your passive income, and reduce the overall portfolio risk.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy.

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