Creating reliable passive income streams is a great way to help fund your retirement, and, before that point, you can reinvest the cash to grow your wealth faster. In other words, everyone should like passive-income investments like Enterprise Products Partners (EPD -0.31%). Here's why this key energy player is so exciting today, even though oil and natural gas prices are bouncing around in volatile fashion... just like they always have.
Steady as she goes
Oil and natural gas are commodities that are prone to massive and often swift price swings. It was just two years ago when the COVID-19 pandemic pushed the prices of these vital fuels to historic lows. Yet today, they are up so much that energy companies are reaping huge profits. While some dividend stocks have proven adept at navigating these cyclical swings while continuing to pay a reliable and growing dividend, it can be hard for investors to stomach the industry's inherent volatility. Note the recent oil price gyrations, with the black gold recently falling around 10% in a single day.
There are, however, a wide range of businesses that fall under the broad energy nameplate. While most are inherently tied to the prices of oil and natural gas, the midstream sector is largely driven by fees. Indeed, Enterprise Products Partners owns the pipelines, refining, storage, and transportation assets that help to move oil and natural gas from where they are drilled to where they get consumed. Roughly 80% of its gross operating margin is derived from fees paid to use its system. That makes the master limited partnership (MLP) a very reliable cash-flow generator.
EPD Dividend Per Share (Quarterly) data by YCharts.
Enterprise also happens to offer a huge 7.6% distribution yield today. That payment has been increased annually for 23 consecutive years. Clearly, Enterprise understands that its unitholders place a high value on their passive income streams.
Safety first
Steady distribution growth alone, however, isn't enough to make Enterprise a great investment. There's more to the story, like the fact that distributable cash flow covered the distribution by a huge 1.8 times in the first quarter. That leaves a lot of room for adversity before a distribution cut is a real risk. In addition, the partnership has an investment-grade-rated balance sheet, so there doesn't appear to be a huge amount of financial risk on the leverage front, either.
But what about the transition toward clean energy? On that issue, investors need to step back and think about how large a shift this really is in a world that is still experiencing population growth. Either/or is not the likely outcome, but all of the above. In fact, according to the International Energy Agency, demand for oil and natural gas is likely to keep increasing through 2040. And that means that Enterprise will continue to see the demand it needs to get paid for decades to come, noting that even if demand peaks in 2040, it will then taper, not fall off a cliff.
Slow and steady
Enterprise is unlikely to be an exciting investment, and the huge yield is likely to represent most of your return. But that probably won't be a problem for those in search of passive income. And yet, with a solid financial foundation and a large $50 billion market cap, Enterprise could end up being an industry consolidator which might add some growth to the story even as the world starts to move toward cleaner alternatives. If you are looking for reliable income, Enterprise is an energy name you'll want to research today.
