You can buy a share of Enbridge (ENB -1.21%) for around $37 today. And a unit of Enterprise Products Partners (EPD 0.45%) costs roughly $26. That means just $200 could get you started in building a long-term position in both of these high-yield midstream players. Here's a look at their businesses and why the high yields are so important.
Moving energy
Enbridge and Enterprise operate in the energy sector in what is known as the midstream. The upstream in the energy sector encompasses oil and natural gas production. The downstream includes companies that process these commodities in refining and chemical plants. The midstream connects the two ends with pipelines, storage, and transportation assets, among other things.
The upstream and the downstream tend to be pretty volatile, with commodity prices having a big impact on financial results. The midstream is a bit different, with Enbridge and Enterprise largely charging fees for the use of their infrastructure assets. That makes them highly reliable businesses with generally stable cash flows.
Although energy prices might vary greatly over time, energy demand is generally very stable. Which is why these two midstream players can afford to pay their massive dividends.
Putting some numbers on that last statement, Enterprise's distribution yield is a huge 7.5%; Enbridge's yield is 7.1%. At this point in time, the best investment opportunities in the midstream sector have been exploited, so the yields are likely to represent the bulk of an investor's return.
More important than you think
Before you move on, thinking that you are a growth-minded investor, consider some other facts here. For example, if the average return over the long term for stocks is around 10% or so, then the yields from Enterprise and Enbridge have instantly gotten you over 70% of the way there.
Both have long histories of annual disbursement increases as well, so they have been very reliable income investments. Enterprise's distribution has been increased annually for 24 years, while Enbridge's streak is up to 28 years.
The numbers here speak for themselves. Looking at total return, which includes the reinvestment of dividends, Enterprise has handily bested an S&P 500 exchange-traded fund over the past three years. Enterprise turned $1,000 into $1,880 or so compared to the S&P, which turned the same $1,000 into roughly $1,480. Enbridge didn't do quite as well as Enterprise, as it "only" matched the market, turning $1,000 to roughly $1,480 over the past three years.
EPD total return price data by YCharts.
To be fair, that's a bit of cherry-picking on the time period. However, the key is that reinvesting the sizable distributions from Enterprise and Enbridge is a reliable way to create value in your portfolio.
In fact, it is even more powerful during bad markets, because you'll be buying more shares. It is a slow and steady way to build wealth that can be a valuable complement to stocks that are backed by fast-growing businesses and no dividends.
Differences to consider
If the idea of adding the compounding power of high-yield stocks to your portfolio sounds compelling, either Enterprise or Enbridge would be a great starting point. That said, there are some notable differences between them.
For example, Enterprise is a master limited partnership, which is a bit more complicated tax-wise. Enbridge is based out of Canada, so the dividend U.S. investors collect will fluctuate with exchange rates, and you'll have to pay Canadian taxes on the income (which can be claimed back when you file your U.S. taxes).
Still, if you have a couple of hundred dollars, both are a good way to build a portfolio with some big dividend compounders in it.
