I first initiated a position in Enterprise Products Partners (EPD +0.19%) back in April 2020. Shares of the midstream energy company had been hammered during the market plunge caused by COVID-19 worries. Buying Enterprise turned out to be a smart move. The stock has delivered a total return of over 120% in less than three years.
Earlier this month, I bought a lot more shares of Enterprise Products Partners. Here's why I've loaded up on this ultra-high-yield dividend stock.
The obvious reason
My description of Enterprise Products Partners gave away the obvious reason I've added to my position in the stock -- its dividend. The company's yield currently stands above 7.6%. Over the last 12 months, Enterprise's share price has risen a little over 2%. But my actual return was much greater, thanks to the especially juicy distribution.
NYSE: EPD
Key Data Points
This isn't unusual for Enterprise Products Partners. Looking back over the last two decades, the stock's total return was more than five times greater than its share price appreciation.
Importantly, Enterprise has increased its distribution for 24 consecutive years. In the nearly three years that I've owned the stock, the distribution has risen more than 10%.
Enterprise shouldn't have any problems keeping its streak of distribution increases going. It paid out 71% of adjusted free cash flow in 2022. With free cash flow continuing to grow, the distributions should continue to flow.
Growth opportunities
I didn't buy additional shares of Enterprise Products Partners for its dividend distribution alone, though. My view is that the stock should appreciate in value over the next several years.
Enterprise operates more than 50,000 miles of pipelines that transport natural gas, natural gas liquids, crude oil, and petrochemicals. Fortunately, its share price doesn't fluctuate based on the prices of the commodities that flow through its pipelines. That's because Enterprise's business model is sort of like a toll booth. However, increased demand for these fossil fuels should translate to more revenue for the company.
Even with the shift to renewable energy sources, the International Energy Agency projects that oil demand will increase rather than decline throughout this decade. Demand for natural gas will almost certainly grow even more robustly because it's cost-effective, plentiful, and has much lower carbon emissions than coal.
Enterprise Products Partners isn't ignoring the opportunities associated with efforts to reduce carbon emissions. It's partnering with Occidental Petroleum on a carbon capture and transportation solution. Occidental believes that carbon capture could ultimately be a market of between $3 trillion and $5 trillion per year.
Stacking up nicely
My view is that the overall midstream energy sector is poised to perform well. The opportunities ahead for Enterprise Products Partners will be available to other companies, too.
Enterprise Products Partners especially stands out to me, though. The stock is more attractively valued than many of its peers, including Enbridge, Kinder Morgan, ONEOK, and Williams Companies. In addition, Enterprise's distribution yield is greater than all four of these other midstream companies.
I'm not banking on Enterprise Products Partners generating another 120%-plus total return over the next three years. However, I expect that it will be a big winner thanks to increasing distributions and solid share price appreciation.
