There's no way to sugar coat it; energy stocks can be incredibly volatile, given that their top and bottom lines are generally tied to oil and natural gas prices. But that's not the case throughout the entire industry, with companies in the midstream sector often collecting fees for the use of their assets. That's exactly why conservative investors will appreciate midstream giants like Enterprise Products Partners (EPD 1.41%) and Enbridge (ENB 2.83%).
1. Big coverage
Enterprise Products Partners is a master limited partnership (MLP) that owns a huge collection of pipelines, storage, processing assets, and transportation facilities. With a market cap of $58 billion, it is one of the largest players in North America. The vast majority of its revenue is derived from fees, which means that the prices of oil and gas aren't all that important to the partnership. It is the demand for its vital infrastructure that is most important.
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The MLP's distribution yield is a hefty 6.9% today. That's backed by a streak of 23 annual increases. And in the first quarter, the cash flow from operations payout ratio was a solid 58%. Meanwhile, Enterprise has always preferred to operate with a conservative balance sheet, sporting a debt-to-earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio that has historically been toward the low end of its peer group. Strong distribution coverage and a solid financial foundation mean that Enterprise and its payout are both robust to industry adversity.
The one caveat is that MLPs come with some tax complications, most notably the need to deal with K-1 forms come April 15. But if you are willing to tackle that small headache, the huge yield here is well worth a closer look.
2. Big diversification plans
Another giant midstream name (at a $90 billion market cap) with reliable cash-flow-generating assets in the energy sector is Canadian midstream giant Enbridge. Oil and natural gas pipelines make up around 58% and 26% of EBITDA, respectively. A natural gas utility operation contributes another 12%. The pipelines are largely fee-based assets, and the utility is regulated, so it is just as reliable a business. This is the core that backs the company's 6% dividend yield.
The dividend, meanwhile, has been increased annually for more than 25 years, putting Enbridge into Dividend Aristocrat territory. Its distributable cash-flow payout ratio, meanwhile, was roughly 57% in the first quarter. And its debt-to-EBITDA ratio was around 4.9 times, which is roughly in line with the company's long-term targets (though higher than the roughly three times Enterprise sports). Long-term dividend investors should like what they see here.
But there's one little bit of the story left to tell. The remaining 4% of EBITDA not discussed above comes from Enbridge's renewable power business. It is, essentially, using its carbon operations to expand into the clean energy sector, which will become increasingly important over time. It has a collection of offshore wind projects in Europe that will come online over the next few years, as well, which should notably increase the size of this division. Management expects to generate as much as $2 billion a year in excess cash flow above its dividends and investment needs, giving it ample capacity to keep pushing in this direction if it so chooses. So, if you are looking for a high-yield energy name but want to hedge your bets against the clean energy transition, Enbridge could be a great name for you.
Safety first
The world will need carbon fuels for a long time to come, but there are big changes on the horizon that will likely lead to volatile commodity prices. In that environment, it makes sense for dividend investors to shift toward the midstream space, which is driven by fees. Two of the biggest players in the space, Enterprise and Enbridge, just so happen to be some of the best positioned to keep paying you well no matter what happens to oil and natural gas prices.
