With the broader market yielding a paltry 2% or so, finding 5% and higher yields is harder than you might think. That's especially true if you want to find companies that regularly grow their distributions over time, helping your income outpace the scourge of inflation. One sector that is filled with solid options, though, is midstream oil and natural gas. It's where you'll find Enterprise Products Partners L.P. (EPD -0.10%), Magellan Midstream Partners, L.P. (MMP), and ONEOK, Inc. (OKE 0.52%), three stocks with 5% or more yields that you just might want to buy.
1. The industry giant
Enterprise has a market cap of nearly $57 billion. It is by far one of the largest players in the midstream space, helping to move oil and natural gas from where it is drilled to where it gets processed and then to where it gets used. Enterprise has one of the most diverse portfolios of fee-based assets as well, consisting of pipelines, processing facilities, terminals, storage, and a fleet of ships.
Image source: Getty Images.
There are good and bad things about the company's size. For example, Enterprise has a lot of opportunities to invest in its business and can shift spending around to where it can be best put to work. However, because it is so large, it has to spend a lot of money to move the growth needle. To put a number on that, Enterprise is planning to spend around $9 billion on capital projects over the next few years.
Enterprise's yield is around 6.4%, the highest of this group. That's largely because it's something of a tortoise, with historical distribution growth of around 5%. In fact, future distribution growth is likely to be a little shy of that over the near term as management focuses on self-funding as much of its investment plan as possible. But it still intends to keep its 20-year history of annual distribution increases going, which means that Enterprise won't excite you, but the income you get from the fat yield should be pleasing just the same.
2. Smaller and fast
Next up is Magellan Midstream Partners, with a yield that just inches over the line at slightly more than 5%. This midstream player is focused on pipelines and storage. Like Enterprise, Magellan's business is backed largely by fee-based assets. There are two notable differences here: size and leverage. Both have also helped Magellan achieve historical distribution growth that's roughly twice what Enterprise has managed.
Magellan's market cap is $16 billion, making it less than a third the size of its giant peer. That means it doesn't have to spend as much to grow its business. Currently, Magellan has plans for $1.6 billion in new projects over the next few years. It can look at smaller acquisitions as well, but that's just half the story.
EPD Financial Debt to EBITDA (TTM). Data by YCharts.
Since the partnership structure is designed to pass income through to unitholders, Magellan and Enterprise have to tap the capital markets to fund a significant portion of their growth. Magellan's lower yield means selling units costs it less than higher-yielding peers. It also has one of the highest credit ratings and lowest levels of leverage in the industry. Thus issuing new debt costs less, too, and it has plenty of room on the balance sheet if it sees a good opportunity.
Low levels of debt and a low cost of capital are both important to the partnership's distribution growth, since each allows more cash to flow through to investors. And that's a good thing if you want to keep outpacing inflation while getting a nice 5% yield. Note that the distribution has been increased annually for an impressive 17 years.
3. Big changes
ONEOK and its 5.3% yield is a little different story. Although revenue here is largely fee-based, this company just bought its associated limited partnership -- it is not an LP. The goal was to gain full control of all of its assets and to reduce its cost of capital in the future, which should make it easier to grow its business and dividends. Admirable goals, to be sure. But there are a lot of moving parts today.
For example, ONEOK's leverage is higher than it would like with debt to EBITDA of over five times. Its near-term goal is to get that number below four times. However, it also intends to keep growing the business and has plans for dividend growth of around 10% a year. What you'll want to pay keen attention to is how it balances the desire for reducing leverage against its desire for expansion and dividend growth.
ONEOK's 2017 projections. Image source: ONEOK, Inc.
With a $21 billion market cap, it doesn't need to spend as much as Enterprise, but it probably has to spend more than Magellan. However, ONEOK's 2017 plan calls for spending that's roughly the same as smaller Magellan's. The numbers this year are a bit complicated because of the acquisition, but you should monitor progress of the dividend, debt levels, and growth spending.
That said, ONOEK has a 15-year streak of annual dividend increases going. So there's no particular reason to doubt it can find the right balance of capital spending, debt maintenance, and dividend payments.
Make a deeper dive for dividends
For very conservative investors focused on yield, giant Enterprise is probably the best option, while Magellan is good for those searching for distribution growth. ONEOK, in the meantime, is worth a deep dive to research the company more fully if you'd like to invest cash in an IRA, since master limited partnerships like Enterprise and Magellan can create tax complications in tax-advantaged retirement accounts.
