Prices go up and down, but oil and gas remain fundamental pillars of society and still do a ton of heavy lifting when it comes to powering the global economy.
While renewable energy might eventually pressure fossil fuels, the International Energy Agency predicts global oil demand will grow by 6% by 2028, signaling at least several years of steady business ahead for energy companies and dividends for investors.
Midstream companies, which help transport oil and gas from extraction sites to export terminals and other destinations, can be dividend machines for investors. Here are two prime examples to help meet your income investing goals.
The king of Canadian midstream
Enbridge (ENB -1.21%) is a Canadian midstream company based in Calgary. It operates a network of pipelines and storage facilities that help move oil and gas from the Canadian oil sands region to the Great Lakes and Gulf of Mexico.
Enbridge operates other businesses, including North America's largest natural gas utility and the development of renewable energy projects.
Pipeline companies operate like a toll road: They make money by charging for the resources moved through their network. This makes the business more predictable than exploring and drilling for oil and gas because it isn't as sensitive to commodity prices as long as the volume still flows through its pipelines.
ENB cash from operations (TTM); data by YCharts. TTM = trailing 12 months.
This helps Enbridge generate steady profits despite occasional significant investments into building and maintaining its physical infrastructure. The company has paid and raised its dividend for 28 consecutive years, meaning Enbridge has successfully navigated major disruptions such as the Great Recession and COVID without cutting its payout.
The stock's dividend yields a generous 7.1% at today's share price. Management is guiding for between $5.25 and $5.65 in distributable profits for 2023. Based on its 2023 annual dividend of $3.55 per share, the stock has a comfy dividend payout ratio of 67%. In other words, investors can buy the stock and enjoy that yield in confidence.
Consider partnering with this master limited partnership
Enterprise Products Partners (EPD 0.45%) is a midstream company based in Houston. Its sprawling network of pipelines and storage facilities helps move a range of commodities throughout the United States, including natural gas, ethane, propane, butane, and crude oil.
Unlike Enbridge, Enterprise Products Partners is structured as a master limited partnership (MLP). This combines the tax benefits of a limited partnership with the liquidity that a publicly traded corporation offers investors.
Those invested in an MLP are called unitholders, and shares of stock are called units. MLPs are common in the energy sector and pay distributions to unitholders.
MLPs don't pay corporate income tax, and the distributions paid to unitholders are usually considered a return of capital and, thus, tax-deferred. In other words, you pay any potential taxes when you sell your units. You should consult a tax professional if you're unsure of the tax implications of owning MLPs like Enterprise Products Partners.
EPD cash from operations (TTM); data by YCharts.
Financially, Enterprise Products Partners functions similarly to Enbridge as they are both midstream companies. Enterprise Products Partners has enjoyed mostly steady operating cash flow over the years and has paid and raised its distribution for 24 consecutive years. The stock yields a whopping 7.5% at its current share price.
Very high dividend yields are sometimes a red flag, but not so for Enterprise. The distribution payout ratio is just 55% of adjusted operating cash flow and 75% of adjusted free cash flow.
Remember, free cash flow is after capital investments into the business, so this is a solid financial cushion that gives management some room if the business stumbles. Investors can buy Enterprise Products Partners for their dividend portfolio and sleep well at night.
