To build a seven-figure nest egg, you have to save money, which is the simple and, perhaps, obvious part of the story. The more interesting part is what you do with the savings. Investing is, for most, the right decision but one that is complex. Here's why millionaires in the making will want to consider high-yield Enterprise Products Partners (EPD -0.24%), Enbridge (ENB 0.11%), and Magellan Midstream Partners (MMP).
What do you do with the cash?
If you spend all of your money, you will never have any left to invest. But once you've started to save some, you have to put it to work if you want to build a million-dollar retirement nest egg. One way to go about that is to focus on growth stocks, or stocks that are expected to appreciate materially in value over time. Another way is to buy value stocks which are cheap today but you expect will see their prices recover. A somewhat overlooked way to build wealth is dividend stocks, which are often seen as a way to create income from a nest egg after it has been built up.
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Here's the thing about dividend stocks, assuming the dividend doesn't get cut: You know a lot about the return you will generate when you buy them. It is, simply, the dividend yield. If that yield is fairly high, then you have gone a long way toward matching the return of the broader market. Making up the difference with capital appreciation is easier at that point. For example, Enterprise's distribution yield is currently 7.2% or so. The long-term return on the market is something around 10%. Enterprise's distribution alone gets you 72% of the way there!
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Here's the next big step: Reinvest the dividends you collect. Thus, over time, you keep buying more and more shares and building your nest egg without ever having to lift a finger. It is the tortoise approach, if you will, to creating a seven-figure nest egg. But it's one that you shouldn't overlook because boring can be very beautiful if you don't enjoy trying to monitor growth and value stocks to ensure they are still worth owning. Indeed, as long as the dividends still get paid, and hopefully increased, you know a dividend stock hasn't changed too much.
Big yields you can count on
Enterprise, Enbridge, and Magellan are all pipeline companies which charge fees for the use of their energy-infrastructure assets. These are vital cogs in the global distribution network for oil, natural gas, and the products into which these commodities get turned. Even when oil prices are low, these businesses tend to see solid demand for their services. And this is why Enbridge has been able to increase its dividend annually for 28 years; Enterprise's distribution has grown for 24 years; and Magellan has upped its payment every year since its IPO in 2001.
Those are incredible streaks given the inherently cyclical nature of the energy sector. If history is any guide, you can count on the cash you'll collect from this trio. Today Enterprise's yield is 7.2%; Enbridge's yield is 6.5%; and Magellan's is 7.4%. There are subtle differences between each company.
First off, Enterprise and Magellan are both master limited partnerships (MLPs), which come with some tax issues. You might want to consult a tax advisor, but there are both positives (tax-advantaged income) and negatives (K-1 Forms) with MLPs. Enbridge is a traditional company, but it is located in Canada, so U.S. investors will have to pay Canadian taxes on the dividends (which can be claimed back at tax time), and the cash U.S. investors collect will vary with exchange rates.
Second, the businesses here have different nuances. Magellan is the most focused, with an asset portfolio tied largely to moving oil and refined products (like gasoline). Enterprise is far larger and more diversified, with notable exposure to natural gas. Enbridge is every bit as large as Enterprise, but its business is very reliant on just a few large pipelines. That said, Enbridge also owns a natural gas utility business and is starting to put money to work in the renewable power space. The latter assets help to future-proof the company given the global push toward clean energy.
Don't overlook the power of dividends
All in all, these three high-yield and reliable income generators can build your portfolio toward million-dollar status one distribution at a time. These aren't the only investments that can do this; they are just three similar high yielders to get you started on your way. You probably won't brag about owning them, or any other dividend stock, at a dinner party, but you also won't need to watch them like a hawk either. Just dividend reinvest and track the dividends as they come along each quarter, and you could be well on your way to a happy retirement.
