Enterprise Products Partners (EPD 0.45%) is kind of boring, but that should probably be seen as a positive attribute for income-focused investors. Indeed, it is hard to complain about collecting a 7.5% distribution yield from an investment about which you don't really need to worry too much. Here are some of this midstream master limited partnership's (MLP's) dividend bonafides.
1. The yield
As an MLP, Enterprise pays distributions and not dividends. That's a function of its corporate structure, which is a bit more complex than a regular company, requiring investors to deal with a K-1 form come tax time. However, there are some benefits, too, such as the fact that a portion of the distribution is likely to avoid current-year taxation by being classified as a return of capital. So investors keep more of the income they receive from the hefty 7.5% or so distribution yield each year.
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But just how generous is that yield? The S&P 500 index currently yields around 1.6%. Energy Select SPDR ETF, basically the energy component of the S&P 500, yields 4.3%. And the even more focused USCF Midstream Energy Income Fund, an actively managed exchange traded fund (ETF), offers a yield of roughly 5.1%. The distribution yield from Enterprise, while coming with some tax hassles, is clearly very attractive.
2. Great distribution history
A big yield alone isn't enough to pick out a great dividend stock. Enterprise really starts to shine when you consider that it has increased its distribution annually for 24 consecutive years. Although that streak should make it clear that management is committed to returning value to unitholders via regular distribution increases, it also pays to think about what has transpired since, roughly, the turn of the century. The list includes the 2000 technology meltdown, the Great Recession, and the global COVID-19 pandemic, which caused severe oil price declines. Enterprise increased its distribution right through all of it.
3. Plenty of distribution capacity
Distributions don't come out of thin air. MLPs have to earn enough money to support them or distributions risk being cut. For MLPs, a key metric to look at is distribution coverage, which is basically distributable cash flow in relation to the actual distribution. Higher numbers are better. In the first quarter, Enterprise's coverage ratio was a robust 1.9 times. That leaves a huge amount of room for adversity before there is a risk of a distribution cut and, likely, some leeway for more increases even if performance were to stagnate for a spell.
4. Strong, on the balance sheet
Big distributions are great, and strong distribution coverage is wonderful, too. But don't overlook the distribution risk posed by a heavily leveraged balance sheet. Indeed, a quick way to free up cash for debt reduction is to reduce how much an MLP passes on to its unitholders in distributions. Enterprise's debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio is among the lowest of its closest peer group.
That positioning, however, isn't a new thing. Enterprise has long focused on maintaining a rock-solid balance sheet. Basically, compared to similar North American midstream companies, this MLP stands out for its financial strength, the foundation on which distributions get paid.
EPD Financial Debt to EBITDA (TTM) data by YCharts.
5. Slow and steady
By this point, it should be pretty clear that Enterprise is a financially strong MLP focused on rewarding investors with a steadily growing income stream. The negative of this is that the yield is likely to represent the lion's share of your return because growth opportunities in the midstream space aren't as robust as they once were. For example, over the past decade, Enterprise's distribution growth has averaged in the low- to mid-single digits. For investors seeking dividend growth stocks, that probably won't cut it. But those looking to maximize the passive income their portfolios generate will probably find this trade-off acceptable.
Looking forward, Enterprise has around $6 billion worth of capital investment projects in the works though 2025. As those projects come on line, they should add to cash flow and distribution-paying capacity. Also, many of Enterprise's contracts include regular rate increases in the fees it charges its customers. And that brings up the partnership's midstream business.
Essentially, Enterprise helps to move oil and natural gas (and the products into which they get turned) around the world. It owns what are vital infrastructure assets that would be virtually impossible to replace. And in many cases, there are few if any other cost-effective options for customers. So long as oil and natural gas remain important global energy sources, Enterprise should have a solid business.
For the reliable yield
All in all, Enterprise is a high-yield investment that is structured from the ground up to support a generous and growing distribution. Once you take the time to get to know it, you really won't have to spend too much time or energy tracking the partnership. Quarterly check-ins are probably all that's needed, which makes this a great no-brainer income investment for yield-seeking investors.
