Despite energy company employees being designated "essential critical infrastructure workers" during the COVID-19 pandemic, the collapse of economic activity made their employment superfluous in many cases. U.S. gross domestic product (GDP), an economic measure of everything produced in the country, suffered the greatest contraction ever recorded with a 32.9% plunge.
With hardly anyone working, there just wasn't much need to use oil and gas, and at one point U.S. crude prices actually turned negative. While the worst predictions of hundreds of oil companies going bankrupt fortunately never materialized, it did help reveal which energy producers were the most financially fit.
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Since oil trades at around $110 a barrel today, a monkey throwing a dart could pick a winning oil and gas company. So while a lot of investors are looking at energy stocks right now because they're flush with cash, those seeking income need a longer-term mindset than just today's oil glut, and would do well to remember those energy stocks that protected their shareholder payouts during the crisis.
If a company maintained its dividend payments during the worst of times, they're a good bet to continue preserving them if rocky times are revisited in the future. That's why Enterprise Products Partners (EPD -0.60%) is my pick for the safest dividend-paying energy stock you can buy today.
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A pipeline to profits
Enterprise Products Partners is one of the largest publicly traded partnerships in the country, and it owns one of the largest pipeline networks in the U.S. This midstream energy services provider handles natural gas, natural gas liquids (NGLs), crude oil, refined products, and petrochemicals such as ethylene and propylene.
It operates some 50,000 miles of pipelines throughout the U.S., offers some 14 billion cubic feet of natural gas storage, and boasts 260 million barrels of storage capacity for NGLs, crude oil, refined products, and petrochemicals. It also has 21 NGL processing plants.
One of the reasons Enterprise is such a strong energy stock is that it derives most of its revenue from long-term, fixed-fee, or take-or-pay contracts, which means it gets paid regardless of whether its customers accept delivery of the product or not. That provides stable revenue streams and predictable cash flows.
The steady-state nature of its operations has allowed Enterprise Products Partners to raise its dividend payment for 23 consecutive years.
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Count on these dividends through thick and thin
Enterprise has grown its dividend at a compounded rate of almost 7% annually over that near-quarter century primarily because of its strong balance. It maintains a BBB+ credit rating, which is the highest among midstream players, and has typically allocated between two thirds and three quarters of its cash flow from operations to distributions.
Serving as the foundation for its ability to maintain payments, it has only 3.2x leverage ratio (measured as debt divided by annual EBITDA, which is backed by $7.3 billion in available credit capacity and unrestricted cash.
Notably, even during the pandemic when other energy stocks were cutting or suspending their payouts, Enterprise Products Partners still raised its dividend, albeit by only 1.1%. Today it's yielding over 7% annually.
A solid business, steady revenue streams, a strong balance sheet, and a record of raising its dividend even during the greatest economic cataclysm in recent memory makes Enterprise Product Partners a great energy stock for income investors and those seeking a good long-term energy play.
