Companies with higher dividend yields can be great options for those seeking to generate passive income. It enables them to produce more income per dollar invested.
For example, $1,000 invested in energy infrastructure giant Enterprise Products Partners (EPD 0.02%) could produce $77 of annual passive income, thanks to its 7.7% yield. For comparison, that same $1,000 would only generate $16 of passive income in an S&P 500 index fund, given its 1.6% dividend yield. That ultra-high-yielding payout makes it a great option for income-seeking investors to consider buying this month.
Sleep soundly with this passive income juggernaut
High-yield dividend stocks often have a higher risk profile. However, that's not the case with Enterprise Products Partners. Quite the contrary, because the master limited partnership (MLP) has a low-risk business model.
The bedrock is its diversified portfolio of energy midstream assets, which includes pipelines, processing plants, petrochemical complexes, storage terminals, and export facilities. These assets generate very predictable cash flow backed primarily by long-term, fixed-rate contracts or government-regulated rate structures. Because of that, the company has limited exposure to commodity price volatility. It also has low volume risk. As a result, it generates relatively steady cash flow in nearly any market environment.
Meanwhile, the MLP pays out a very conservative portion of its stable cash flow -- 54% in 2022 -- to support its big-time distribution. That enables it to retain a significant percentage of its earnings to finance expansion projects. The company also has a top-notch balance sheet. It has a strong investment-grade credit rating, backed by a leverage ratio below its target range. That gives it even more financial flexibility to fund its growth.
These features put its ultra-high-yielding distribution on a very firm foundation. Because of that, investors won't lose any sleep worrying about whether Enterprise Products Partners can maintain its monster payout should economic conditions worsen in the coming year.
Even more income in the future
Enterprise Products Partners' strong financial foundation allows it to pay a big-time distribution while investing in expanding its operations. The company has made $4.4 billion of capital investments this year, including spending $3.2 billion to acquire Navitas Midstream and investing nearly $1 billion in organic growth projects. These investments helped grow its distributable cash flow by 16% to $1.9 billion in the third quarter.
That enabled the MLP to increase its distribution to investors by another 5.6%. Enterprise Products Partners has now grown its payout for 24 straight years.
The company has plenty of fuel to continue growing its operations and distribution in the future. It currently has $5.5 billion of commercially secured expansion projects under construction. Projects include new natural gas processing plants, additional export capacity, and another petrochemical manufacturing facility. They should come online through 2025, providing the company with visible growth for the next several years.
Meanwhile, Enterprise Products Partners has other projects under development that could help fuel future growth. For example, the company and its partner, Enbridge, recently received a record of decision for the Sea Port Oil Terminal (SPOT) project, which is a significant milestone. It puts the companies closer to sanctioning the project, which would export oil under a long-term contract with oil giant Chevron. It would supply Enterprise and Enbridge with steady cash flow to sustain and grow their big-time payouts while providing Chevron and other customers greater access to global oil markets.
The company is also pursuing a range of lower-carbon energy projects. For example, it signed a letter of intent to work with Occidental Petroleum on a potential carbon dioxide transportation and sequestration solution for the Texas Gulf Coast region. Enterprise has an extensive pipeline system in the area that it could repurpose to help reduce carbon emissions and support Occidental's carbon capture ambitions. That could boost the MLP's fee-based income while extending the life of its legacy fossil fuel infrastructure, further enhancing its ability to sustain and grow its big-time payout.
A top-notch passive-income producer
Enterprise Products Partners has been an exceptional income stock over the years. That seems likely to continue since it has plenty of fuel to continue growing its operations and ultra-high-yielding payout. The MLP's combination of attractive income and upside makes it a great company to buy for passive income this month.
