Enterprise Products Partners (EPD 0.45%) and Enbridge (ENB -1.21%) have not performed particularly well over the past decade. Both are down by more than a third from their high-water marks over that span. There's a good reason for that, but it is also opening up an opportunity for dividend investors looking to add reliable high-yield stocks to their portfolios in December. Here's what you need to know.
The midstream sector has shifted gears
The easy explanation for the steep price declines at Enterprise and Enbridge is that they are reliant on carbon energy, which is not held in high regard these days. But that's not the whole story. At one point, midstream companies were rapidly building new assets and growing their businesses at a fairly swift pace. That all changed about a decade ago when it became harder to find attractive opportunities to build new assets. Thus, growth slowed down. On top of that, the energy sector has increasingly been under pressure from the shift toward renewable power.
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But here's the interesting thing: Enterprise and Enbridge are basically toll takers. They own energy infrastructure (like pipelines) that is vital to the global energy sector and get paid fees for the use of those assets. Energy prices aren't all that important to their cash flows; rather, demand is. And demand tends to be strong even when oil prices are low. Looking forward, meanwhile, demand for carbon fuels is projected to remain at or above current levels until at least 2050, according to OPEC, the Energy Information Administration (EIA), and the International Energy Agency (IEA). So there are still decades of tolls for this pair to collect.
Enterprise is the pure-play midstream option
Of the two midstream giants, Enterprise is the more focused option. Basically all of its business is dedicated to owning and operating energy pipelines, storage, processing, and transportation assets. It has a particular focus on natural gas, which is cleaner burning than coal and oil, and is viewed as a transition fuel. But this company is still pretty much all-in on the carbon fuel economy.
That said, Enterprise's distributable cash flow covers its distribution by 1.7 times and it has an investment-grade balance sheet. There's a decent margin of safety here before the distribution would be at risk. The distribution, meanwhile, has been increased annually for an impressive 25 consecutive years. The 7.4% yield will likely make up the lion's share of returns here, but $6.8 billion worth of capital investment projects on tap through 2026 should help support continued distribution growth. Add in acquisitions and contractual rent increases, and a total return of around 10% isn't out of reach.
Enbridge is moving in a cleaner direction
Enbridge's pipeline portfolio has huge ties to the oil industry, but it also operates natural gas pipelines, a natural gas utility, and renewable power assets. And it is in the process of buying three more natural gas utilities. After that deal is consummated, which should happen in steps throughout 2024, Enbridge's business will be broken down between oil pipelines accounting for about 50% of earnings before interest, taxes, depreciation, and amortization (EBITDA), natural gas pipelines 25%, natural gas utilities 22%, and clean energy 3%. While that's still heavily carbon focused, oil used to be nearly the entire business, so Enbridge is living up to its longer-term plan to shift toward cleaner alternatives.
The Canadian company has an investment-grade balance sheet and it pays out about 65% of its distributable cash flow, which is smack in the middle of management's guidance range. Meanwhile, Enbridge believes the three regulated natural gas utilities it is buying will solidify its long-term capital investment plans, increasing its backlog of potential investments to $24 billion. That, in turn, should help the North American midstream giant lengthen its already impressive streak of 28 consecutive annual dividend boosts.
Enbridge's 7.6% yield is near historical highs, suggesting that now could be a good time to invest in this reliable midstream company that is working to change with the times. Like Enterprise, Enbridge's yield is going to make up most of an investor's return, but if you are looking to maximize the income your portfolio generates, that will probably be just fine.
Simple businesses, lots of cash
Enbridge and Enterprise provide what is essentially the backbone of the energy industry. Without the assets they own, modern society would grind to a halt. That should lead to decades of reliable cash flows from these fairly simple businesses and, in turn, a steady stream of income for investors. While growth isn't the big story here, the income will more than make up for that for the right kind of investor.
