Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low it's not even worth the paper your check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say that these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out the previous selection.
This week, we'll turn our attention to the nation's largest midstream operator by market value, Enterprise Products Partners (NYSE:EPD), and I'll show you why this energy middleman is an income investors dream stock.
At the mercy of others
While this article is aimed at pointing out why Enterprise Products Partners is a company most income investors should consider for their own portfolio, it isn't without risks. Perhaps the biggest risk that Enterprise Products carries is that it's not 100% in control of its cash flow.
To begin with, Enterprise Products has zero control over the weather. This means there will be years when the winter is warm and less fuel will be needed to heat homes. That could cause E&P companies to slow production as inventory levels rise and demand falls. Secondly, Enterprise is at the mercy of E&P drillers. If they run into production issues or simply refuse to spend to increase production it can adversely impact how much the company is transporting and storing. Finally, it has no control over spot commodity prices which ultimately encouraging E&P drillers to increase or scale back production. If natural gas prices plunge, for example, it could see a notable reduction in natural gas storage and transport revenue.
The other concern with Enterprise Products is its debt level. It's not as if the company isn't well-capitalized at the moment with $988 million in cash and $4.5 billion in borrowing capacity, but it's also lugging around a backbreaking $18.4 billion in debt. Although this debt looks well under control given its current cash flow generation, if interest rates do rise it could tighten the midstream giants' ability to borrow in order to make acquisitions or build out its enormous U.S. pipeline network.
The Enterprise Products advantage
While a lack of control over the weather and commodity prices might represent some of the bigger challenges for Enterprise Products shareholders, its greatest advantage might be in the fact that upgrading our nation's energy infrastructure is practically a necessity.
According to my Foolish colleague Arjun Sreekumar via a recent study from ICF International, energy companies are going to need to invest $641 billion between now and 2035 in order to meet rising energy demands and new production finds both onshore and offshore. That's more than $29 billion per year! Investors understand that following where the investment dollars are flowing can usually yield good investing results.
As Arjun notes as well, Energy Products Partners has $5.8 billion worth of capital projects slated for completion through 2016. With the majority of these projects being fee-based and allowing the company to lock in longer-term contracts it cancels out many of the above concerns and offsets the uncertainty surrounding commodity price and weather fluctuations.
The proof is also in the pudding of Enterprise Products Partners' results. In its latest quarter the company grew it adjusted EBITDA by 8.7% while its distributable cash flow increased by 16% to $1.07 billion. The company attributed these gains to a 14% increase in liquid volume transport to 5.1 million barrels per day, primarily from the Eagle Ford shale, Permian Basin, Marcellus shale, and the Gulf of Mexico. Furthermore, the company's fee-based natural gas processing volumes rose to a record 4.7 billion cubic feet per day. With direct transport access to a number of high-growth hot spots and close to 50,000 miles of pipeline, Enterprise Products appears to be holding all the cards when it comes to negotiating its long-term deals.
Show me the money
Yet the greatest reason of all why Enterprise Products Partners should be on your watchlist, and why income investors should be salivating with excitement, is that this master-limited partnership has raised its dividend in an eye-popping 39 consecutive quarters!
Allow me to repeat that in case you casually glossed over the last sentence. Enterprise Products Partners has raised its payout in 39 consecutive quarters! What was once a $0.3725 payout per share in 2004 has grown into a $0.71 per share payout that would equate to a projected annual yield of 3.9%.
With the expectation that energy demand is only going to grow domestically over the long run, the idea of steady growth in Enterprise's distribution -- perhaps 2%-5% per year -- isn't out of the question. If you're looking for a low volatility dividend payer that has the potential to trump the yield of U.S. Treasuries over the long run while also giving you share price appreciation potential, then I'd strongly suggest moving Enterprise Products onto your watchlist.
Your search for great dividends doesn't have to end here. Our top analysts have handpicked a group of high-yield dividend stocks just for you!
The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool recommends Enterprise Products Partners. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.