This has been a roller-coaster year for investors. The stock market rolled to its worst start in over 50 years throughout the first six months, only to rally strongly during the summer and stall out again last month.
The growth-oriented Nasdaq Composite has been even more volatile, losing over 30% of its value as it plunged from the heights hit nearly one year ago. In fact, that change in investor mindset really set the tone as sentiment transitioned from momentum-fueled growth stocks to seemingly more staid dividend stocks.
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There's a good reason for the switch: Income-generating stocks can help smooth the wide swings the market makes in periods of upheaval, and companies that continue to make their payouts throughout the turmoil help underscore the strength of their businesses.
Dividend stocks have a rich history of handily beating those that don't reward shareholders. Income stocks are a great place to put your money to work in uncertain times like those we're in now, but investors are cautioned not to chase yield: When dividend yields exceed 4%, stocks tend to become riskier.
Many, but not all, which is why I think Enterprise Products Partners (EPD -0.60%), whose dividend currently yields an ultra-high 7.1% annually, is actually an excellent stock to buy and hold forever.
Man in the middle
Enterprise Products Partners sits in the sweet spot of the oil and gas industry. It has no upstream exploration and production responsibilities and no downstream retail operations. It primarily focuses on the pipeline transport of natural gas liquids (NGLs), such as ethane, propane, and butane, and exporting them globally.
Enterprise has 50,000 miles of pipelines, 23 NGL processing plants, 14 billion cubic feet of natural gas storage, and over 260 million barrels of storage capacity for NGLs, crude oil, refined products, and petrochemicals.
NGLs are an area that offers one of the industry's greatest economic value opportunities because of their wide variety of uses. Ethane is a building block of ethylene, which is essential to producing plastic; propane is used for heating and fuels and is another feedstock in the production of ethylene and propylene; and butane is a feedstock in ethylene and butadiene production, which are necessary for creating synthetic rubber.
The midstream giant makes its money from long-term, fixed-fee, or take-or-pay contracts, so it gets paid regardless of whether its customers accept delivery of the product. Its generous cash distribution is also especially appealing, particularly as it has increased the payout for 23 consecutive years.
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Safe and secure payout
As one of the largest master limited partnerships (MLP), Enterprise Products Partners is required to pass along almost all of its profits to its shareholders in the form of dividends. Based on its current financials, investors needn't worry about the payout being suspended or cut any time soon. The distribution was 56% of its adjusted cash flow from operations (CFFO), indicating plenty of room for continued growth. Further, its distribution-coverage ratio, or the amount of cash flow available for distribution versus what it actually disburses to its shareholders, stood at 1.9 at the end of the most recent quarter.
Although the ratio should typically not go below 1, as that would imply the dividend is unsustainable, investors would find an MLP cutting it that close much too risky. They're looking for a cushion, and demand growth capital spending comes mostly from their operating cash flows. In its recently reported second quarter, Enterprise expects growth capex to be $1.6 billion for the year, while it generated $2.1 billion in operating cash flows for the quarter.
Sitting pretty
Enterprise Products Partners is operating on solid ground. NGLs are vital to the global economy and are used in everyday consumer products, including clothing, mobile phones, and even diapers. And as the world's largest exporter, the MLP stands to benefit most from the increasing global demand for these products.
Despite Enterprise being a high-yield dividend stock, investors are not incurring excess risk from its shares and can safely own it for decades into the future. Just know, stocks like Enterprise Partners can lag when the markets are booming. The key to success is holding on for the long-term through the cycles and reinvest when the stock lags. You'll be well rewarded for your patience.
