As 2023 got under way, the S&P 500 index rallied up toward the peak levels it achieved at the start of 2022 and then started to pull back a little. Some market watchers called it a new bull market and others have held off, waiting for the index to move past its previous peak.
Either way, it's hard to suggest the market is cheap today. But if you look closely, there's almost always cheap stocks floating around. Regardless of where the market goes next, Enterprise Products Partners (EPD -0.77%) and Medtronic (MDT -5.11%) could both be good additions for income investors right now.
1. Enterprise has vital assets
As a midstream master limited partnership (MLP), Enterprise Products Partners owns things like energy pipelines, storage, transportation, and processing infrastructure. Although the MLP is focused on North America, these are the assets that help to move oil, natural gas, and the products they create around the world.
The key to the business, however, is that Enterprise charges fees for the use of its assets. That largely insulates it from the commodity price volatility that typifies most energy investments.
In the second quarter, the investment grade rated pipeline business generated enough distributable cash flow to cover its distribution by 1.6 times. That provides ample leeway for adversity before the distribution would be at risk, though it was down a bit from previous levels. The distribution, meanwhile, has been increased annually for 25 consecutive years. This is a very reliable income stock even though it operates in the volatile energy sector.
The interesting part is that the distribution yield is a huge 7.5%. That's toward the high side of the MLP's historical yield range, suggesting that the units are cheap today. To be fair, with a yield that high, the distribution is likely to represent the lion's share of an investor's return.
Indeed, capital investment opportunities in the midstream sector are far more modest today than they were in the past. However, 7.5% gets you a long way toward the historical 10% return that most people expect from the broader market. That's hard to complain about.
EPD Dividend Yield data by YCharts
2. Medtronic is shifting into a higher gear
Medtronic's streak of annual dividend increases is even more impressive, at 46 years. The medical device maker manufactures products that range from pacemakers to insulin pumps to surgery robots. It is a key provider to the healthcare industry.
The last few years haven't been great, with a number of headwinds depressing earnings. For example, the company faced delays in getting diabetes products approved, it was hit with some product recalls, and its surgery robot was delayed. While none of that is good news, all of it is likely to be, or has already proven to be, temporary.
Growth should pick up once management has worked through the problems. But go in knowing that fiscal 2024 is going to be a tough year on the earnings front, with guidance predicting a year-over-year earnings decline of as much as 5.5%.
Looking further ahead, Medtronic is spinning off a couple of slower-growth businesses. This is good news because the more robust growth from the rest of the business will be increasingly visible once the transaction is complete. But the current plan is to maintain the dividend after the spinoff, so income investors won't even notice. And while the 3.3% dividend yield isn't huge on an absolute basis, it is historically high for Medtronic. Like Enterprise, that suggests the stock is cheap right now.
Good prices and good yields
It can be hard to pull the trigger on an investment when the broader market looks expensive, even if the stocks you are considering look cheap. Don't let that stop you. If you have a couple thousand dollars to invest, putting half into Enterprise and half into Medtronic when their yields are historically high and their prices look low is very likely to be a good long-term call.
