It's hard to point to the precise number, but there is a point at which you stop thinking "this dividend yield looks great" and start going "this dividend yield is very high. What's wrong?". With a yield of 7.7%, Enterprise Products Partners (EPD 0.35%) is starting to trend into the "what's wrong" territory. Even though the company has raised its payout every year since its IPO in 1998, the only times its yield has been higher was during the dot-com bust, the Great Recession, and the early days of the pandemic. 

So let's look at whether the oil and gas pipeline company is in good enough shape to keep its payout going and why the market seems to be so sour on this stock. 

Can its payout last?

One thing that Enterprise's management has done exceptionally well over the past couple of decades is preserved the company's ability to maintain & modestly grow its payout. We can point to a myriad of reasons why that is the case -- a resilient revenue stream, a conservative balance sheet, strict capital allocation guidelines -- but the one that is the most likely is the company's ownership.

Just over 32% of the company is held by the family of Enterprise's founder, Dan Duncan. Even more important is that because of the partnership structure, the Duncan family also has sole voting power for the board of directors. There is little incentive for company insiders with that significant of a stake and sole voting power to make any board decisions that would disrupt its ability to pay out its investors. 

Perhaps most encouraging, though, is that its business is arguably in the best financial shape in decades. Its reported leverage ratio -- net debt divided by adjusted EBITDA -- is the lowest it has been in decades at 3.1 times. Its free cash flow payout ratio is 70%. Both of these metrics suggest the company can easily maintain its payout for many years to come. 

So why all the negativity?

The conservative nature of Enterprise's management and its position as a pipeline and processing company that receives revenue from fixed-price contracts should, in theory, generate a lot of investor interest. Especially those looking for steady income for possibly decades. Sure, Enterprise is structured as a master limited partnership, which means it doesn't play well with retirement accounts, and many institutional investors and ETFs won't invest as a result. Still, today's 7.7% yield should be enticing for many investors. 

As with all things investing, there are trade-offs. In the case of Enterprise, you're trading high yield today for what will likely be tepid payout growth over the short to medium term.

Since its revenue streams are more or less fixed based on its fee-based contracts, there isn't much growth in its existing assets. So to grow its payout significantly, it requires large capital spending to expand its asset footprint. 

Its spending rate has dropped precipitously in recent years, though. In 2019 alone, it spent $4.2 billion on developing new assets. Under its current capital spending, it has about $5.5 billion in projects that won't all be completed until 2025. At its current rate, its annual capital spending is about 3% of its market capitalization. It will be immensely hard to grow its payout faster than this absent some other moves.

Based on management's history, that's unlikely. Over the years management has tended to make decisions that preserve the balance rather than pull harder on growth levers.

Should you buy now?

At Enterprises' current stock price, investors are sacrificing payout growth (and stock price growth) for a resilient balance sheet and steady payments. That may sound good right now, but keep this in mind. Enterprise Products Partners' stock is 5% below its price from 10 years ago. Being able to accept the fact that your return will likely only come in the form of dividends is hard to do when the market is rallying. 

With that in mind, a 7.7% yield is one of the better times to invest in a business where the bulk of your return is cash payments. If we are entering a period of higher interest rates and growth is hard to come by, Enterprise could be a stock that generates a respectable total return.