Investors looking for a generous yield will likely be attracted to Enterprise Product Partners' (NYSE:EPD) fat 7.8% yield. That's a huge five times larger than what you would get from an S&P 500 Index fund today. That alone, however, isn't a good reason to buy this high-yielder. Here are some things to think about before you step onboard.
1. The distribution
Since the distribution is probably what attracts most dividend investors to Enterprise, it makes sense to start with the payment. The yield is not just large, it is also well supported. In 2020, a very difficult year for companies in the energy sector, Enterprise covered its distribution with distributable cash flow by 1.6 times. That leaves a material amount of room for adversity before a distribution cut is a serious threat.
That said, Enterprise has a very impressive history of returning value to investors through distributions. It has increased its annual payment every year for 22 consecutive years. That includes a hike in 2020 and its most recent increase in the first quarter of 2021. Clearly, increasing the distribution is important for management, and it strives to do so in both good years and bad. To be fair, the increases have been small recently and historically tend toward the low-to-mid-single digits. However, with such a large yield right now, 7.8% is likely to be enough to satisfy investors looking to maximize their current income. Notably, over the past decade the average annual hike has exceeded the historical rate of inflation growth, which means the buying power of the distribution has grown over time.
2. The partnership thing
With that out of the way, the next most important thing to know about Enterprise is that it is a master limited partnership (MLP). This is a more complicated structure than a typical corporation and comes with some tax issues, notably the annual K-1 form. MLPs also don't play well with tax-advantaged retirement accounts. Put simply, you should probably talk to a tax expert before deciding to buy Enterprise or any MLP. This fact alone could be enough to make you look elsewhere, particularly if your investable cash is in an IRA.
3. The carbon issue
Another major consideration is that Enterprise operates in the midstream space. It owns pipelines, storage, and processing assets that help get oil and natural gas from where it is drilled to where it is eventually used, in various different forms. If you want to avoid carbon-tied industries, Enterprise is not a great option for you. That said, the partnership is a vital link in the energy industry, and so long as the world still needs oil, natural gas, and the products into which they are made, demand for Enterprise's assets and services should hold up.
And while the partnership expects the push toward cleaner alternatives to be a headwind, it also believes that the fuels that flow through its system will remain important for years to come. Driving that will be global population growth and countries moving up the socioeconomic ladder, which will lead to a need for more energy of all types. You need to believe in that logic if you invest here.
That said, growth has historically been driven by new assets built from the ground up. That won't likely be the opportunity it once was given the increasing push toward clean energy. This suggests that existing assets will increase in value, which is good for Enterprise. However, it also means that growth will likely come increasingly from acquisitions. With a roughly $50 billion market cap, the partnership is one of the biggest players in the midstream sector. Moreover, it has a long history of conservatively managing its balance sheet, so it is financially strong, too. Thus it should be in a good position to switch toward acquisitions if that, indeed, is the direction the midstream industry heads. Meanwhile, its large and diverse portfolio of assets gives it plenty of opportunity for bolt-on additions.
Complicated but still attractive
When you boil it down, Enterprise won't be a perfect fit for all investors. However, for those seeking a generous and well-supported yield, it might still be a pretty good option. That's especially true if you believe that the transition to clean energy will be a long-term process and not an overnight success. Indeed, if oil and natural gas remain important for years to come, as Enterprise expects, this high-yield midstream giant should be well-positioned to continue rewarding investors very well for sticking around.