If you are trying to build a portfolio around passive income stocks, you are probably looking for high-yield opportunities. Enbridge (ENB -1.21%) and Enterprise Products Partners (EPD 0.45%) will be attractive, given their 7.7% and 7.6% respective yields. The interesting thing here is that these yields aren't a symptom of high risk, because these are two of the most boring and reliable income investments you can find. Here's what you need to know.
A toll-taker business model
Enbridge and Enterprise both own energy infrastructure. These are the assets that help to move oil and natural gas around the world, including pipelines, storage, processing, and transportation infrastructure. It would be hard, if not impossible, to replace the assets these companies own. In fact, they are two of the largest midstream companies in North America.
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The key fact here, however, is that Enbridge and Enterprise largely charge fees for the use of their assets. In this way, they are toll takers, and the often volatile prices of oil and natural gas aren't really all that important to their top and bottom lines. Energy demand is the key driver, and demand tends to remain resilient regardless of energy prices. Thus, these midstream giants produce fairly consistent cash flows over time.
The best example of this is found in their quarterly disbursements. Enbridge has increased its dividend annually for 28 consecutive years. Master limited partnership Enterprise has increased its distribution for 25 consecutive years. To be fair, dividend growth is likely to be modest over time, which is a key factor in the high yields. So expect that the yield is going to represent the lion's share of return here.
Rock-solid infrastructure owners
Stepping a little deeper into these two businesses, the story only gets better. For example, both Enbridge and Enterprise have investment-grade-rated balance sheets. In other words, they are financially strong and have the ability to withstand a little adversity. Their long streaks of annual disbursement increases proves this, but it is nice to see that credit rating agencies recognize this as well.
Then there's the distributable cash flow payout ratio, which is roughly 60% for Enterprise and 65% for Enbridge. And while Enbridge's distributable cash flow payout ratio is higher, it is right in the middle of the company's target range of 60% to 70%, so there's no particular reason for investors to be worried about the difference between the two payout ratios.
That said, some investors might be worried about the future of carbon fuels, given that the future of these two midstream players is effectively tied to oil and natural gas. The Energy Information Administration (EIA) and the International Energy Agency (IEA), two of the world's most notable industry watchers, both agree that oil and natural gas will remain vital to the global energy ecosystem for decades into the future -- basically for as far as their current outlooks examine, which is to 2050. That should keep the cash flows going and the disbursements flowing for Enterprise and Enbridge.
For income lovers, though not for everyone
As already noted, the yield you collect from Enbridge and Enterprise will likely represent most of your total return here. So these two midstream operators are best suited to investors looking to maximize the income their portfolios generate. Anyone looking for growth will probably end up disappointed. But if decades of passive income is what you're after, now is a great time to look at adding this pair of high yielders to your portfolio.
