3 Top Energy Stocks to Buy in July for Passive Income

Key Points

• Enbridge has increased its 6%-yielding payout for 30 straight years.

• Energy is volatile, but Chevron is a survivor with a strong dividend track record.

• Enterprise Products Partners is a midstream company on the cusp of growth.

• 10 stocks we like better than Enterprise Products Partners ›

The energy sector generates lots of cash flow. That provides companies with the money to pay big dividends. Because of that, it can be a great place to invest for passive income.

Enbridge (NYSE: ENB), Chevron (NYSE: CVX), and Enterprise Products Partners (NYSE: EPD) stand out to a few Fool.com contributing analysts as great energy dividend stocks to buy this July for passive income. Here's what makes them ideal options for those seeking lucrative income streams.

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Built to generate durable dividend income

Matt DiLallo (Enbridge): Enbridge has been one of the most reliable dividend stocks in the energy sector over the decades. The Canadian pipeline and utility company has paid dividends for over 70 years. It has increased its payment every year over the past three decades.

The company generates very predictable cash flows. Cost-of-service agreements and long-term, fixed-fee contracts back 98% of its earnings. Its earnings are so predictable that Enbridge has achieved its annual financial guidance for 19 years in a row.

Enbridge pays 60% to 70% of its stable cash flows out in dividends. That provides a nice cushion while allowing the company to retain meaningful excess free cash flow to fund expansion projects. The company also has a strong investment-grade balance sheet. Those features provide it with billions of dollars of annual investment capacity to fund expansion projects and bolt-on acquisitions.

The company currently has a multibillion-dollar backlog of commercially secured expansion projects underway. They should come online through the end of the decade. Enbridge's backlog gives it tremendous visibility into its growth. It expects to increase its cash flow per share by a 3% annual rate through 2026 and by 5% per year thereafter.

That fuels Enbridge's view that it can continue increasing its dividend, which yields around 6%. Enbridge's high-yielding and steadily rising dividend makes it a top energy stock to buy for passive income this month.

Chevron is built to survive oil market volatility

Reuben Gregg Brewer (Chevron): There are two things that income investors will want to note about integrated energy giant Chevron. First, it has an attractive 4.7% dividend yield. Second, the dividend has been increased for a whopping 38 consecutive years. Either one of these numbers alone is interesting, but together they are nothing short of impressive, given the inherent volatility of the energy sector.

The long streak of dividend increases is built atop a rock-solid business. Chevron has exposure to the entire energy value chain and a global portfolio of assets. This diversification helps to soften the peaks and valleys that come along with the often dramatic swings in oil and natural gas prices.

This "integrated" business model sits atop a balance sheet that is among the strongest in the integrated peer group, with a debt-to-equity ratio of around 0.2. Essentially, Chevron has the leeway to take on debt during industry downturns so it can keep funding its business and its dividend. When oil prices recover, as they always have historically, it reduces leverage.

CVX Debt to Equity Ratio data by YCharts

The end result of Chevron's business approach is a dividend that passive income investors can count on through thick and thin. The attractive yield today is related to normal volatility in oil prices (energy prices are a bit weak) and some company-specific issues (a difficult-to-close acquisition and Chevron's investment in Venezuela).

But given the strong business foundation here, the high yield is probably best seen as an opportunity for long-term dividend investors to jump aboard a reliable income stock.

A solid bet for passive income

Neha Chamaria (Enterprise Products Partners): If I had to pick one energy stock right now to earn passive income, I'd put my money on Enterprise Products Partners, a company with a solid foothold in the midstream energy space and an incredible dividend track record.

Enterprise Products is one of the largest midstream energy companies in the U.S. It enjoys inelastic demand as it supplies energy infrastructure services under long-term contracts, 90% of which also have escalation clauses that mitigate the impact of inflation on Enterprise Products' cash flows and dividends.

That explains why Enterprise Products has been able to grow its cash flows consistently over the years and increase its dividend for 26 consecutive years. It is highly likely that the company will continue to increase dividends for years to come, more so because Enterprise Products is on a solid footing right now.

This year is a significant one for Enterprise Products, as $6 billion of the $7.6 billion worth of capital projects that were under construction are expected to come online. Meanwhile, the company's backlog is also growing. These projects should drive Enterprise Products' cash flows higher and support its dividend growth and yield. Given the backdrop, the stock's 6.9% yield looks bankable and safe, making Enterprise Products a compelling dividend stock to buy now.

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Matt DiLallo has positions in Chevron, Enbridge, and Enterprise Products Partners. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer has positions in Enbridge and TotalEnergies. The Motley Fool has positions in and recommends Chevron and Enbridge. The Motley Fool recommends BP and Enterprise Products Partners. The Motley Fool has a disclosure policy.