If you're looking for a dividend stock you can count on, Enterprise Products Partners (EPD +1.20%) is one worth considering. For over 25 years, the company has raised its distribution annually to shareholders, and today, it yields investors 7.7%.
Enterprise Products Partners operates in the oil and gas industry, but its structure makes it less vulnerable to the wild price swings in these energy products. The company is a solid dividend stock, but there are at least three things you'll want to consider before scooping up shares today.
NYSE: EPD
Key Data Points
1. Enterprise Products Partners is one of the largest midstream operators in the U.S.
Enterprise Products Partners provides the infrastructure needed to move stuff like natural gas, oil, and chemicals across the U.S.
As a midstream energy company, Enterprise and its 50,000 miles of pipelines keep the energy flowing like a giant highway system, ensuring products get from point A to point B. Its pipelines in key production basins, like the Permian, connect them to major refining centers and export terminals in the U.S.
Because it's not an oil driller, it's less susceptible to fluctuations in oil and gas prices. Instead, Enterprise generates predictable cash flows through long-term contracts with upstream drilling companies, most of which are fixed-fee contracts. This focus on reliable income through long-term contracts supports its growing distributions and makes it ideal for income-focused investors.
2. Enterprise is a master limited partnership, which has important tax considerations
Enterprise operates as a master limited partnership (MLP), a legal structure many midstream companies choose to operate under. MLPs are publicly traded limited partnerships, so investors can easily buy and sell units on a stock exchange.
As an MLP, Enterprise is a pass-through entity, meaning its profits, losses, deductions, and credits are passed on to investors. For a company to operate as an MLP, the IRS requires it to earn 90% of its income from qualifying sources, including exploration, production, and transportation of natural resources. Income from real estate activities also qualifies, but most MLPs operate in the energy sector.
The tax structure of MLPs can make them appealing to income-focused investors in search of attractive dividend distributions. However, this structure also has important tax implications that investors want to consider.
MLPs send their limited partners a Schedule K-1 form come tax time, providing investors with their share of income, gains, losses, deductions, and credits. These forms tend to go out later in tax season, meaning investors must wait until later to file their taxes.
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Because MLPs have large depreciation expenses and other tax deductions, a portion of the distribution (around 10% to 20%, which can vary depending on various factors) is considered taxable income. The remainder of the distribution is viewed as a return of capital and reduces your cost basis in the MLP.
As a result, a significant portion of taxes on those distributions is deferred until you sell your units in the MLP. Also, because unit holders can transfer their units to heirs tax-free, MLPs can also be quite attractive for estate-planning purposes.
The tax treatment of MLPs can make them a little more complicated than typical dividend-paying stocks. Investors should be aware of this difference in tax treatment and consider consulting a tax advisor come tax time.
3. Enterprise's rock-solid balance sheet and future projects support future distribution growth
Enterprise sits on solid financial footing. The company has $29 billion in outstanding debt, and about 96% of this debt is fixed-rate, making it less vulnerable to the swings in interest rates we've experienced over the past couple of years. Not only that, but its use of leverage is modest, and the company has a higher credit rating than its midstream peers.
The company has also done an excellent job of expanding its operations through growth projects and strategic acquisitions, which has driven its growing distribution to unitholders for 25 consecutive years.
Last year, Enterprise acquired Navitas Midstream for $3.2 billion, providing growth opportunities in the Permian Basin. The MLP also has over $6.8 billion in major projects under construction through the end of the third quarter.
Image source: Getty Images.
Additionally, it forecasts that its capital expenditures will range between $3 billion and $3.5 billion next year, with these investments contributing to further growth in its cash flow per unit to support further capital returns.
An excellent income producer for dividend investors
Enterprise Products Partners has a robust balance sheet and a high credit rating, putting its high-yielding distribution on a firm foundation. It offers a reliable payout that has grown consistently for 25 years and has several projects in the pipeline -- making it a solid choice for income-focused investors.
