Enterprise Products Partners (EPD -0.41%) currently yields 7.4%. That's several times above the dividend yield on an S&P 500 index fund. Further, Enterprise has increased its high-yielding payout for the last 24 straight years.
However, it's easy to overlook Enterprise Products Partners, even with its outsized yield and growth profile. That's because it's a master limited partnership (MLP), which among other things, precludes it from membership in the S&P 500 index. As a result, Enterprise won't gain entry to the vaunted Dividend Aristocrat list next year when it should hit the quarter century milestone. With more income growth ahead, passive income seekers won't want to overlook this MLP.
Drilling down into Enterprise Products Partners
Enterprise Products Partners is an MLP focused on operating energy midstream assets like oil and gas pipelines, processing plants, storage and export terminals, and petrochemical plants. These assets generate relatively steady fee-based cash flows backed by long-term contracts and government-regulated rate structures. That gives it the money to make lucrative cash distributions to investors.
MLPs have certain tax advantages that further enhance the appeal of this passive income stream. The IRS treats MLPs as limited partnerships for tax purposes, which are pass-through entities. That means all profits, losses, and deductions (including depreciation) flow through to investors. As such, the partnership doesn't pay taxes on the corporate level. Meanwhile, a portion of an MLP's distribution is usually a return of capital instead of dividend income. That reduces an investor's cost basis, enabling them to defer paying taxes on the income until they sell.
However, there are trade-offs to the tax benefits of investing in an MLP. Instead of receiving a simple Form 1099-Div at tax time, investors receive a more complicated Schedule K-1 that usually doesn't arrive until mid-March, potentially delaying when investors can file their tax returns. Further, the potential of MLPs earning unrelated business taxable income (UBTI) prevents investors from holding many in a tax-advantaged retirement account like an IRA.
Those possible tax complications cause many investors to overlook MLPs. However, the income can make the trade-offs well worth it.
The fuel to continue distributing income to investors
Enterprise Products Partners generated a record $2 billion of distributable cash flow in the second quarter of 2022. That's 30% higher than the prior year, fueled by recently completed expansion projects, acquisitions, and improved conditions in the energy market. That was enough money to cover the company's current distribution by a comfy 1.9 time. It enabled Enterprise to retain $974 million of cash for other purposes, including funding expansion projects.
The company currently expects to invest $1.6 billion in growth projects this year. That's part of a $5.5 billion (and growing) backlog of expansion projects it has under construction. The company anticipates these projects coming online through 2025, giving it visibility into future cash flow growth.
Meanwhile, the company has several other projects in development. For example, the MLP has partnered with pipeline giant Enbridge (ENB 1.60%) to build a large-scale offshore oil port. The partners have secured Chevron (CVX 1.04%) as an anchor customer on that project. It will provide Chevron's oil access to global markets while supplying Enbridge and Enterprise with stable cash flows.
The company is also working with Chevon and fellow oil producer Occidental Petroleum (OXY 0.88%) on carbon capture, transportation, and storage infrastructure. Those projects would enable the oil companies to capture, transport, and sequester carbon dioxide, reducing the emissions profile of their oil production. Meanwhile, the projects would leverage Enterprise's infrastructure footprint to repurpose old pipelines and build new ones to sustain and grow its cash flows in the future.
The company's backlog of construction projects and development pipeline should help fuel cash flow growth for years to come. That should enable Enterprise to continue increasing its cash distribution. The MLP has given investors a 5.6% raise over the past year. Meanwhile, it has boosted its payout 74 times since its initial public offering in 1998. This year marks its 24th consecutive one of increasing its payout.
Elite-level growth from an overlooked source
Many people overlook MLPs because of their tax considerations. That's causing them to miss out on Enterprise Products Partners' elite ability to consistently increase its cash distribution. The company should have no problem continuing to expand its payout in the future. It's a great option for those seeking an attractive and steadily rising passive income stream.
