You probably know that carbon fuels are not held in high regard today because of fears concerning global warming. And yet, the world would perhaps literally would come to a screeching halt without oil and natural gas.
If you can stomach investing in an out-of-favor sector that likely still has decades of demand ahead of it, you might want to consider midstream names like Enterprise Products Partners (EPD +0.75%), Enbridge (ENB +0.33%), and, for the more forgiving sorts, Kinder Morgan (KMI +0.57%). Here's why.
1. Avoiding the volatility
Enterprise Products Partners, Enbridge, and Kinder Morgan all operate in the energy sector, but they are midstream stocks. That means that they own the pipelines, storage, processing, and transportation assets that help move oil and natural gas. These are generally fee-based businesses that aren't nearly as impacted by commodity prices. As such, their cash flows tend to be pretty resilient, with demand a bigger issue than what an end customer is paying at the pump on any given day, month, or year.
Image source: Getty Images.
2. Big, big names
All three are North American giants. Enbridge is by far the biggest, with a market cap of nearly $95 billion. Enterprise is next at around $60 billion, with Kinder Morgan chiming in at $45 billion. On top of that, each has a collection of assets that would be hard, if not impossible, to replace.
Size also comes with advantages in the midstream space right now. It has become increasingly difficult to build new pipelines because of environmental concerns, among other factors. So the industry is likely to shift toward consolidation, which big names like Enbridge, Enterprise, and Kinder Morgan can pull off without too much difficulty. All three names, in fact, have made acquisitions in the past year.
NYSE: EPD
Key Data Points
3. Big yields
The S&P 500 Index yields a scant 1.3%. The average energy stock, using iShares U.S. Energy ETF as a rough proxy, yields 2.3%. But Enbridge's yield is a relatively huge 5.8%. Master limited partnership (MLP) Enterprise's distribution yield is an even more generous 6.6%. And Kinder Morgan pulls up the rear with a 5.5% dividend yield.
NYSE: ENB
Key Data Points
However, this is where some differences start to show up. Enbridge has increased its dividend for 27 consecutive years. Enterprise's streak is up to 23 years. After a dividend cut in 2016, Kinder Morgan falls woefully behind on this point.
Worse, Kinder Morgan actually told investors in late 2015 to expect a dividend increase in 2016. Although the cut was probably the right move for the company, conservative types who place a high value on dividend consistency might rightly have a trust issue here. That said, the company has gotten back on the dividend growth path with increases in each of the past four years, including 2022. If you can look past the cut, the well-run midstream company is probably still worth a deep dive for more forgiving yield seekers.
NYSE: KMI
Key Data Points
4. The future
All three midstream giants are squarely focused on moving oil and natural gas today. But they aren't ignoring the future. For example, Enbridge has a small but growing clean energy business that is being supported by its carbon fuel transmission assets. Kinder Morgan's big acquisition in the past year was a renewable natural gas developer that basically helps to turn landfills into energy businesses. And while Enterprise hasn't made a sizable shift toward clean energy, it is heavily focused on natural gas, which is expected to be a transition fuel as the world weans itself off of dirtier options like coal and oil.
In short, there's no particular reason to believe their core operations are at risk. In fact, each could see more demand as the years go by.
Sit back and enjoy the dividends
There's no such thing as a perfect investment. Enbridge, Enterprise, and Kinder Morgan all come with some warts. But today, investors may be paying too much attention to the carbon issue and too little to the sustainability of their energy-backed cash flows. If you can look beyond the headlines, this trio could be for you. The one caveat here is that Kinder Morgan's dividend cut might make Enbridge and Enterprise better options for more risk-averse dividend investors.
