Perhaps the most exciting thing about Enterprise Products Partners (EPD 0.45%) is its huge 7.5% distribution yield. After that, the North American energy giant is, well, a little boring. But that's actually why investors looking for passive income will like the master limited partnership (MLP) in both bull and bear markets. Here's a quick look at this high-yield energy giant.
Enterprise Products Partners does basic things well
The energy industry breaks down into three broad segments: upstream (drilling for oil), midstream (pipelines that move oil), and downstream (chemicals and refining). Revenue and profits in the upstream are highly dependent on energy prices, which tend to be hard to predict. The top and bottom lines of downstream companies are impacted by both energy prices (which are a key input) and the often volatile prices of the commodities they produce (like gasoline). Midstream businesses more or less move energy between the upstream and the downstream.
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The key difference with the midstream is that most companies charge fees for the use of their vital infrastructure assets. It's like charging a toll at a bridge, and it produces highly reliable cash flows over time. This is where Enterprise Partners operates and it has one of the largest midstream portfolios in all of North America. Demand for these assets is a far larger driver of the MLP's financial results than energy prices. And, notably, even during weak periods (for energy and/or Wall Street), demand for midstream assets tends to remain robust.
As evidence of this, Enterprise has now increased its distribution annually for 25 consecutive years. Backing that yield is an investment-grade balance sheet and distributable cash flow that covers the payment by a hefty 1.8 times. There is plenty of room for adversity before the partnership's lofty distribution would be at risk.
The good and bad news about Enterprise
So Enterprise has a large portfolio of midstream assets that produce reliable cash flow to support a steadily growing distribution. Add in the 7.5% distribution yield and you can see why dividend investors would find this MLP attractive. Looking forward, the partnership has $4.1 billion worth of capital investment projects to support future growth, with some not expected to be completed until 2026. In other words, it is reasonable to anticipate the future will be fairly similar to the recent past.
And that is also the bad news, at least for investors looking for a fast-growing company. Enterprise expands its business via large capital investment projects. There are a limited number of attractive projects today because many of the best have already been built. So slow and steady is the only reasonable expectation for the future. If the distribution were to grow in the low- to mid-single digits, it would be a big win for investors. That's roughly what has been the case over the past decade.
That means that Enterprise is probably most appropriate for more conservative income investors. However, consider the 7.5% yield again, which gets you very close to the roughly 10% return that the broader market has averaged over the long term. Now add in dividend growth of just 2.5%. Stocks often rise along with the growth in their dividends. Add 2.5% to 7.5% and you get 10%, which is likely to be fairly reliable through both good and bad times given the vital nature of the infrastructure Enterprise owns. Not bad for a boring energy MLP.
Enterprise could be a cornerstone investment
Reliable, rewarding, and conservative isn't something you'll likely brag about to your friends. But in the investing world, that's the type of holding that can help you succeed through the market cycle. If you are looking for a high-yielding passive income investment, put Enterprise on your shortlist for the next bull market and the next bear market ... and everything in between.
