Many companies pay dividends. However, few offer the size and consistent track record of Enterprise Products Partners (EPD 0.45%). The midstream master limited partnership (MLP) provides a 7.6%-yielding payout that has steadily risen for almost a quarter century.
Because of that, it's a great option for investors seeking to generate passive income. Given its current yield, it can turn a $1,000 investment into $76 of annual passive income. That's about $60 more than an investor could generate from an S&P 500 index fund, given its 1.7% dividend yield. Here's a look at what makes it an excellent option for passive income-seeking investors.
A fortress-like financial profile
Enterprise Products Partners is a premier energy midstream company. It has a diversified portfolio of midstream assets, including pipelines, storage capacity, processing plants, export facilities, and petrochemical complexes. The MLP's fully integrated platform handles crude oil, natural gas, petrochemicals, natural gas liquids (NGLs), and refined products. It primarily generates fee-based income as those energy products flow through its system, enabling it to generate steady cash flow in almost any market environment.
The MLP generated almost $8 billion of cash flow from operations last year. That was enough to cover its high-yielding distribution to investors by a comfortable 1.9 times. It thus produced excess cash to help finance its expansion. Last year, the company invested $5.2 billion, including $3.4 billion in acquisitions and $1.6 billion in capital projects. The company easily covered the remainder with its strong balance sheet.
Even with those incremental borrowings, Enterprise Products Partners' leverage ratio fell from 3.1 times debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) in 2021 to 2.9 times last year. That's toward the low end of its 2.75 to 3.25 times target range. As a result, it has one of the highest credit ratings in the midstream space. That gives it significant financial flexibility.
The fuel to continue growing
Enterprise Products Partners' strong financial profile allows it to continue investing in expansion projects. The company expects capital spending to increase this year to $2.3 billion-$2.5 billion as it completes several larger-scale expansions. That's part of the $5.8 billion backlog of expansions currently under construction. Those projects should come online through 2025, giving it lots of visibility into future cash-flow growth. Meanwhile, it has several other expansion opportunities under development to fuel future growth.
The MLP has the capacity to finance those organic expansions and continue making acquisitions as opportunities arise. The company has a long history of making accretive acquisitions that expand its footprint and enhance its cash flow. Last year, it bought Navitas Midstream for $3.2 billion to expand into the Midland basin. The immediately accretive deal has already exceeded the company's expectations. The MLP also opportunistically purchased 580 miles of pipelines for $160 million to optimize and expand its NGL and petrochemical systems on the Texas Gulf Coast.
The growing cash flow from organic expansions and future acquisitions should enable Enterprise Products Partners to continue increasing its distribution. The company has expanded its payout for 24 straight years, including another 5.4% last year. It appears poised to achieve the quarter-century milestone this year.
A premium passive income producer
Enterprise Products Partners' premier midstream portfolio enables it to generate lots of stable cash flow. That allows the company to pay investors a hefty distribution while retaining cash to fund expansions. Those investments should continue growing its cash flow, giving it more money to increase the payout. Enterprise Products Partners is thereby a premium option for those seeking to collect passive income.
