Pipelines help move energy from where it is drilled to where it is used, with most players in the niche charging fees for using their assets. It is not an exciting business, but it is a reliable one that sidesteps the material ups and downs that energy production companies experience on the top and bottom lines.
And pipelines have historically offered investors big yields. If you are an income-focused investor with $5,000 in your pocket, you might want to look at Enterprise Products Partners (EPD 0.36%), Kinder Morgan (KMI -0.06%), and Enbridge (ENB -0.29%).
Enterprise Products Partners: Slow and steady wins the race
Master limited partnership (MLP) Enterprise Products Partners is one of the largest midstream companies in North America, sporting a market cap of roughly $50 billion. It also happens to have a very generous 7.7% yield. The distribution, meanwhile, has been increased annually for 24 consecutive years, if you include the hike just made in 2022. The dividend has historically grown in the low single digits, but with a high yield and a distribution streak like the one this MLP has achieved, most dividend investors probably won't mind.
Enterprise has material operations in the oil and refined products (around 35% of gross operating margin), but nearly two-thirds of its business is tied to natural gas. Natural gas, viewed as a transition fuel, has gained a material share of the energy sector as countries move away from dirtier power options like coal and oil.
As that shift continues, Enterprise appears well positioned to benefit, noting that it has $4.6 billion of capital investment projects under construction and planned to be in service over the next few years, a good portion of which are natural gas-focused.
Kinder Morgan: Regaining investor trust
Kinder Morgan is similar to Enterprise in many ways, with a $38 billion market and a generous 6.6% dividend yield. Like Enterprise, Kinder Morgan has been increasing its focus on natural gas, which makes up nearly two-thirds of its business. One of the biggest differences, however, is on the dividend front.
In 2016 Kinder Morgan cut its dividend after having told investors to expect a dividend increase of as much as 10%. The cut was the right move for the company, which had to choose between investing in the business or paying the dividend. However, the cut was still a significant blow to investors looking to live off the dividends Kinder Morgan paid. More conservative types might want to look elsewhere for this reason alone.
Since that point, the company has regularly increased the dividend, focusing on dividend safety over dividend growth. For long-term investors who are a bit more aggressive, the reset in 2016 seems to have put the company on a much sounder financial footing, noting that its debt-to-earnings before interest, taxes, depreciation, and amortization (EBITDA) level has fallen from around 9 times when it cut the dividend to a far more reasonable 5.6 times today. Far from perfect, Kinder Morgan is still worth a look.
Enbridge: Shifting slowly toward clean energy
Canada's Enbridge, an $80 billion midstream giant, has materially more exposure to oil than either of the other two names here, with oil pipes at roughly 58% of its business. That said, natural gas pipelines make up 26% and a natural gas utility operation 12% of the business. It offers a hefty 6.5% yield and is generating around $2 billion more in cash flow than it can invest. Right now, it is buying back stock, but that money could easily be pushed to fund acquisitions, internal investment, or higher dividend payments.
The real differentiator here, however, is the 4% of the company dedicated to clean energy, including things like solar and wind farms. This is no side business -- roughly a third of Enbridge's current capital investment plan is dedicated to the space. A trio of large offshore wind projects in Europe are expected to come online over the next few years.
So investors get a big yield from a pipeline company that's actively using the reliable cash it generates to expand directly into clean energy. That's not a bad option at all for those looking for a diversified long-term holding. And, in case you were wondering, Enbridge has increased its dividend annually for 27 consecutive years.
Plenty of choices
If you are a dividend investor with some cash burning a hole in your pocket, don't fear, the pipeline sector has something for you. Enterprise is an MLP with a slow and boring business model that has proven itself over time. Even the most conservative types will likely find it appealing. Kinder Morgan is a bit more of a wild card, given the dividend cut in 2016. But, for more forgiving types, it has reduced leverage and has returned to dividend growth. Meanwhile, Enbridge offers a high yield and a clear path for including clean energy in the mix, all backed by reliable pipelines.