Key Points

It is difficult to locate bargains in the energy sector after its robust price advances this year.
Energy Transfer has gained from increased volumes.
Enterprise Products Partners has been funding expansion initiatives.
10 stocks we like better than Energy Transfer ›

The energy sector, which reacts to crude oil and natural gas prices, has performed well for investors this year because of rising commodity prices.

In particular, with oil prices surging after the start of the Iran conflict earlier this year, the S&P 500 Energy sector advanced 40% this year, through June 8. Energy stocks' price gains easily surpassed the S&P 500 ex-Energy's 22.9% rise.

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The quick price gains make it hard to find stocks in the sector trading at fair valuations. However, I have identified two pipeline and transportation companies that meet the criteria.

Better still, they offer high dividend yields and a track record of increasing payouts. That makes them appealing stock investments for their total return potential over a long period.

Image source: Getty Images.

1. Energy Transfer

Energy Transfer (NYSE: ET) moves oil and gas, including through pipelines, and stores energy, among other operations. That is a more stable business than exploration and production energy firms, whose outcomes depend on commodity prices. Instead, Energy Transfer, while not fully shielded from energy prices, depends more on transport volumes of natural gas and crude oil.

The company recorded higher volume across operations in the first quarter, and revenue rose 31.1% year over year to $27.8 billion. Its quarterly adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), a key metric used by management, climbed 20.5% to $4.9 billion. That is also a proxy for cash flow.

Energy Transfer applies this cash flow to reward shareholders with steadily higher dividends. After cutting the payout in half in 2020, at the start of the pandemic, the board of directors has increased dividends each quarter for the last several years. That includes the first-quarter rise from $0.335 a share to $0.3375 a share.

At the new rate, Energy Transfer's shares carry an attractive 7.2% dividend yield. That dwarfs the S&P 500 index's 1.1%.

Energy Transfer's shares have advanced 13.8% this year, through June 11. That sounds positive, but it lagged the overall energy sector. Still, investors can count on a steadier business versus the highly volatile exploration and production companies.

Although the stock's price-to-earnings (P/E) ratio has risen from 14 to 16 during this time, it remains lower than the S&P 500 Energy's P/E multiple of 21.

2. Enterprise Products Partners

Enterprise Products Partners (NYSE: EPD) is also a midstream energy company. Its operations include moving energy through its pipelines, as well as processing and storing the commodities.

Revenue dropped 6.7% year over year to $14.4 billion, mainly due to lower marketing revenue. Its top line suffered from reduced prices and volumes, which are cyclical rather than a sign of fundamental weakness in Enterprise Products Partners' core business. Importantly, the company's adjusted EBITDA grew 10% despite the revenue drop.

Management has also been funding projects like adding processing capacity in the Permian Basin and pipeline expansion, which should boost revenue and profitability over time.

While making these investments, investors can also feel confident about dividends. Over the last year, the company paid out 57% of its adjusted cash flow from operations as dividends and share repurchases.

The company has raised dividends annually for a number of years. Most recently, the board increased the quarterly payout earlier this year, from $0.545 per share to $0.55 per share.

At the $2.20 annual rate, the stock offers an appealing 5.9% dividend yield, more than quintuple the S&P 500's yield.

Energy Product Partners' stock price has advanced 15.7% this year. That also trailed the S&P 500 Energy sector, although many companies in that index have results with greater sensitivity to oil prices.

The shares' P/E ratio increased modestly from 12 to 14 during this time. However, that compares favorably to the S&P 500 Energy's P/E multiple.

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Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.