With the stocks in the S&P 500 Index yielding a miserly 2% or so on average, how would you like to step up to yields of 6% or more? For a dividend-focused investor, that might sound too good to be true, but it really isn't. The midstream sector is out of favor on Wall Street, yet some of the biggest and best names are offering incredible yields today. Here's a quick rundown on three -- Enterprise Products Partners (NYSE:EPD), Magellan Midstream Partners (NYSE:MMP), and Enbridge (NYSE:ENB) -- that are all yielding more than three times as much as the S&P.
1. The bellwether
With a roughly $60 billion market cap, Enterprise is among the largest energy companies in North America. It owns a massive collection of pipelines, storage, ports, processing facilities, and transportation assets with which few can compete. Like the other names on this list, most of its businesses are driven by fees and long-term contracts, so the ups and downs of oil prices don't have a material impact on the limited partnership's top and bottom lines -- it is demand for the oil and gas that is more important.
Enterprise's current distribution yield is around 6.3%, backed by 22 years of annual distribution hikes. Its debt levels are modest, with debt to EBITDA of 3.2 times falling toward the low end of the industry. And it has an incredibly strong distribution coverage ratio of 1.7 times through the first half of 2019 (1.2 times is considered good for a midstream company). The midstream giant has been working to self-fund more of its capital spending, so it doesn't need to tap the markets to raise money as often. That should make Enterprise an even more conservatively run business.
Looking forward, the partnership has $6 billion in growth projects in the works. As those projects come online over the next couple of years, it should be able to increase the distribution even more. Historically speaking, investors should expect mid-single-digit growth over time, which is more than enough to outpace inflation. Couple that with the high yield today, and Enterprise is a good option for most investors.
2. A temporary lull
Magellan Midstream is a much smaller player in the industry, with a roughly $15 billion market cap. It is focused mostly on pipelines (93% of operating margin) but has some storage (7%) too. The big selling point, however, is that it has historically been one of the most conservatively managed names in the midstream space. For example, its debt-to-EBITDA ratio of roughly 2.4 times is even lower than that of Enterprise. (The partnership is usually among the least leveraged names in the midstream space.) Its coverage ratio is a bit lower, at roughly 1.2 times, but that is still a very solid number. The yield, meanwhile, is around 6.1% today, backed by distribution increases in each and every quarter since it came public in 2001 (roughly 19 years).
The big problem for Magellan is that it has a giant capital spending program in place today but little on the horizon for the next few years. That has some investors worried that it won't be able to keep growing its business, but history suggests that won't be true, and management deserves the benefit of the doubt. In fact, it is currently looking at around $500 million in projects, which is more than enough to put capital spending back into its normal historical range.
The big reason investors might prefer Magellan over Enterprise is distribution growth. Over the past decade, Magellan's distribution has grown at an annualized rate of 10%, roughly twice the level of Enterprise. Although the future is a bit hazy today, distribution growth is likely to come down a touch from that level. Conservative investors with a focus on distribution growth over high yield should be looking very closely at Magellan right now.
3. Looking up north
The last name on our list is Enbridge, a giant North American midstream company that hails from Canada. With a $70 billion market cap, it is even larger than Enterprise. It currently offers a 6.3% yield and has increased its dividend every year for 23 years (dividends are paid in Canadian dollars, so the actual amount a U.S. investor will receive varies with exchange rates).
Before you jump aboard, there are a few positives and negatives to think about here.
One notable positive is that Enbridge is structured as a regular corporation, so there are none of the tax complications that come with limited partnerships. Another big plus is that Enbridge has historically grown its dividend in the 10% range over time and plans to keep that trend going. It has CA$19 billion in projects in the works right now and believes it can self-fund around CA$5 billion to CA$6 billion a year thereafter. And Enbridge is a little more diversified, with 15% of EBITDA coming from natural gas utility assets (the rest comes largely from pipelines). So far, so good.
The fly in the ointment is that Enbridge has a long history of using more leverage than peers like Enterprise and Magellan. Its debt-to-EBITDA ratio is currently around 5.0 times and has been much higher in the past (the most recent spike was because of a simplification move in which Enbridge bought a number of controlled partnerships). Higher leverage, however, is the trade-off here for higher dividend growth. If you can stomach that extra risk, Enbridge has a long history of success behind it, including rewarding dividend investors impressively over time.
A good collection of high yields
In a 2% yield market, looking at yields of 6% or more might make some investors worry. That's not an unreasonable response, but there's little reason to fear the high yields on offer from this trio of midstream names. Enterprise and Magellan are appropriate for just about any portfolio. Enbridge's more aggressive use of debt should probably keep the most conservative investors on the sidelines, but if just a little bit of extra risk doesn't bother you, it's another solid high-yield option to look at today.