The midstream sector, which owns the energy infrastructure that helps move oil and natural gas, was once growing at a rapid clip. That's no longer the case, and Wall Street has punished industry participants. However, there's long-term opportunity in the sector for investors that are trying to maximize the income they generate from their portfolios. Two of the most attractive stocks to buy during this industry's long dip are Enterprise Products Partners (EPD 0.45%) and Enbridge (ENB -1.21%). Here's a quick look at each of these high yielders.
Enterprise is a slow and steady tortoise
Enterprise Products Partners is a master limited partnership (MLP), a business structure designed to pass income on to investors in a tax efficient manner. It comes with some tax headaches, most notably the need to deal with a K-1 form come tax time. You might want to consult a tax specialist if you buy it. But what you'll get for that extra effort is a huge 7.6% distribution yield.
That's not the whole story, however. The distribution has been increased annually for 25 consecutive years. The annualized increase over that span was roughly 7%. The MLP also has an investment-grade-rated balance sheet. And it happens to be one of the largest midstream players in North America, so it has the scale and strength to be an industry consolidator.
Enbridge is shifting with the world's energy demands
Enbridge is based out of Canada, so it pays dividends in Canadian dollars. The actual dollar amount U.S. investors receive will fluctuate along with exchange rates. Investors also have to pay Canadian taxes on the dividends, though those taxes can be claimed back when you file U.S. taxes. That said, the dividend yield on offer is near historic highs at 7.7%.
The dividend has been increased annually for 28 consecutive years, growing at an annualized rate of 5% since 2019. Enbridge has an investment-grade-rated balance sheet and, like Enterprise, is one of the largest midstream companies in North America.
One key difference between Enbridge and Enterprise is that Enbridge has been shifting from a heavy focus on oil to one that increasingly includes natural gas (it owns natural gas utilities and natural gas pipelines) and clean energy. Enterprise is heavily focused on natural gas. Essentially, Enbridge is trying to match its business to the broader demand for energy. But roughly 97% of earnings before interest, taxes, depreciation, and amortization (EBITDA) is still derived from carbon fuels.
The world needs an all-of-the-above strategy
Given the heavy focus both of these midstream giants have on carbon fuels, you might think the stocks being down over 30% from the highs reached last decade make sense. Indeed, demand for clean energy is growing rapidly at the expense of dirtier energy sources. But don't ignore this dip in price -- it is what has helped push both yields up to such attractive levels.
Yes, the yield will be the lion's share of your return for each of these investment choices. But the yield gets you most of the way toward the long-term average market return of around 10%. Add in the growth in the disbursements, which is expected to continue, and you can easily envision the stocks trending slowly higher over time.
But the big story is demand for the largely fee-based services offered by Enterprise and Enbridge. According to the Energy Information Administration (EIA), demand for oil and natural gas could grow through 2050. OPEC sees demand for these vital global fuels expanding through at least 2045. And the International Energy Agency (IEA) expects demand for carbon fuels to peak in 2030, but still remain robust through at least 2050. In other words, the world will still need carbon fuels even as clean energy demand increases. And that means continued demand for Enbridge and Enterprise for decades to come.
For income lovers, but not for everyone
Enterprise and Enbridge are not exciting investments with huge growth potential. They are slow and boring, and there will be a lot of investors that would be better off avoiding them. However, if you are an income investor looking to maximize the income your portfolio generates, they should be very interesting to you today while they are so deeply out of favor. All in, there's no reason to believe that the reliable income streams these midstream giants provide is going to dry up anytime soon.
