If you are looking to create a high-yield portfolio to provide you with a reliable passive income stream, consider Enterprise Products Partners (EPD 0.45%) and Enbridge (ENB -1.21%). These two brilliant high-yielders are midstream giants that have paid investors well for decades. Here's a quick look at each and the safety of their 7%-plus yields.
Clean energy is important, but so are carbon fuels
One of the biggest concerns that investors often have with regard to Enterprise and Enbridge is their focus on carbon fuels. Each of these companies owns midstream assets, which is basically the infrastructure backbone of the carbon economy. The list of assets in their portfolios includes things like pipelines, storage, and transportation infrastructure. For the most part, these midstream companies charge fees for the use of these assets, which provides reliable cash flows regardless of the price of oil and natural gas. They are pretty boring businesses.
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The long-term issue is that carbon fuels are increasingly out of favor as the world pushes toward cleaner alternatives. That's a great storyline, but the truth is that the world's energy needs are expanding. Yes, clean energy is growing quickly, but an "all of the above" energy strategy is the most likely outcome. Even the most pessimistic view of the future suggests that oil and natural gas demand will be robust through at least 2050. In other words, there's ample time for investors to collect the huge yields on offer from Enterprise and Enbridge.
Enterprise is an industry consolidator
Of these two companies, Enterprise is more heavily reliant on the energy industry. That said, with a market cap of nearly $60 billion, it is one of the largest participants in the North American midstream sector. Add in an investment-grade rated balance sheet and this master limited partnership is in a strong position to be an industry consolidator. That's an important factor here because capital spending opportunities are likely to be meager going forward since the most attractive midstream investment opportunities have largely been developed.
From an investor's point of view, that means that the yield will likely make up the lion's share of your total return. But with a yield of 7.4%, this fact probably won't bother income-minded investors. Contractual fee increases, modest capital investments, and acquisitions (such as the $3.2 billion purchase of Navitas Midstream in 2022) should be enough to keep the distribution growing (it has been increased annually for 25 consecutive years and counting) in the low- to mid-single digits.
Add modest capital appreciation of just 2.6% a year to the yield and you have achieved the coveted 10% return many investors target. The biggest issue here is probably the fact that Enterprise is a master limited partnership, which can make your taxes more complicated to deal with.
Enbridge is shifting with the world around it
Enbridge has a market cap of over $70 billion and a yield of roughly 7.5%. The dividend has been increased annually for 28 consecutive years. The company is based out of Canada, so its dividend is paid in Canadian dollars. U.S. investors will have to pay Canadian taxes on the income (which can be claimed back at tax time) and the actual dollar value of the dividend will fluctuate with exchange rates.
The big draw here over Enterprise is diversification. Both midstream giants are investment-grade rated and own energy pipelines, storage, and transportation infrastructure. But Enbridge adds a natural gas utility and clean energy investments to the mix. Enbridge is currently in the process of buying three more natural gas utilities, all of which should be added to the portfolio in 2024.
Although a small clean energy business and natural gas utilities add balance, the real attraction is that these assets are in line with the broader energy transition taking place in the world (natural gas is cleaner burning than coal and oil, and is considered a transition fuel). This is, in fact, the long-term goal of the company, as it looks to use cash flows from "dirty" oil as the foundation for future "cleaner" investments elsewhere. This should support slow and steady dividend growth over time.
Nothing exciting, but reliable is a brilliant outcome
When it comes to high-yield investments, you want to focus on strong and sustainable businesses. There's still time to buy Enterprise and Enbridge because both are out of favor at the moment, at least partly because of their carbon energy exposure. If you can look past that to see the big energy picture, which suggests that oil and natural gas are still vital, you might want to consider these 7%-plus yielding midstream companies. Enbridge may be a better fit for those who want a little bit of a clean energy hedge.
