If you are looking for a big yield in the energy space, you should hone in on the midstream sector. Two of the largest, most reliable companies in the midstream business are Enterprise Products Partners (EPD 0.45%) and Enbridge (ENB -1.21%). And both have yields in excess of 7% today. Here's a quick primer on what you need to know.
The big problem for energy isn't as big as it looks
Before getting into a discussion of Enterprise and Enbridge, it is important to address the elephant in the room -- the clean energy transition. It is completely reasonable for investors to be concerned that renewable power will displace oil and natural gas and leave midstream companies with worthless stranded assets. That may happen someday, but it's not likely to happen anytime soon.
Image source: Getty Images.
Energy is the lifeblood of modern society, and more and more people are moving up the socioeconomic ladder. That means demand for power is going to increase.
Now add in a global population that is still expanding, and there's even more demand on tap. In fact, the Energy Information Administration (EIA) and International Energy Agency (IEA), the two most important industry watchers, agree that oil and natural gas will remain vital contributors to the global energy equation for decades to come.
How important? The EIA and IEA expect carbon fuel demand to either remain flat or grow through at least 2050. In other words, there's plenty of time for investors to collect big dividends from the midstream sector.
Enterprise has a slight income edge
Between Enbridge and Enterprise, Enterprise has a slight edge on the income front. Its yield is about 7.6% compared to Enbridge's 7.5% or so.
That said, there's more to this story. Enterprise is a master limited partnership (MLP), a corporate structure designed to pass income on to unit holders in a tax-efficient manner.
For example, some of the income an MLP pays will often be treated as a return of capital that reduces an investor's cost basis. That has the effect of reducing current taxes, though the cost basis will be lower, so capital gains taxes will be higher when the MLP is sold. Still, if you are looking to maximize income today, Enterprise has an edge beyond its slightly higher yield.
That said, there are some offsets. MLPs are fairly complex, so you need to make sure you understand what you are buying. And you'll have to deal with a K-1 form come tax time. You might want to consider an accountant if you own MLPs.
Enbridge is simpler in that it is a regular corporation. However, it is a Canadian company, so U.S. investors have to pay Canadian taxes on the income they collect (which can be claimed back at tax time). And the Canadian-issued dividend has to be translated into U.S. dollars, so the actual value U.S. shareholders collect will vary along with exchange rates. So Enbridge is less complex in some ways and more complex in others.
Enterprise is all in, and Enbridge is hedging its bets
The businesses of both Enterprise and Enbridge are backed by massive portfolios of energy infrastructure assets. They are two of the largest midstream players in North America, with pipeline, storage, processing, and transportation assets that would be virtually impossible to replace.
These are largely fee-based assets, meaning that Enterprise and Enbridge basically collect tolls for their use. So energy price volatility isn't that big a deal to either company. Demand, discussed earlier, is the more important determinant of success.
That said, there's a nuance here as well. While Enterprise has basically focused all of its efforts on oil and natural gas midstream assets, Enbridge has sprinkled other things into the mix. For example, it just agreed to buy three natural gas utilities from Dominion Energy (D -1.02%). That will complement a natural gas utility it already owns and make it one of the largest regulated natural gas utility companies in North America.
In addition to that, it is building a renewable power business. While small today, it is something of a hedge for the company that addresses the very long-term future in which clean energy starts to displace carbon fuels. The added diversification offered by Enbridge might interest more conservative investors.
The really big number
So Enterprise and Enbridge are both providing vital services to an oil and natural gas industry that should see robust demand for decades to come. There are subtle, though important, differences between them, including their corporate structures, home countries, and portfolio compositions. But there's one thing that both have managed to great success, and that's increasing their annual disbursements. Enbridge wins out here with 28 consecutive annual dividend increases, but Enterprise isn't far behind, with 25 annual distribution hikes.
It wouldn't be fair to suggest that one of these two midstream giants is "better" than the other. They are both very attractive income stocks and well positioned to prosper. But one might be a better fit for your portfolio. If you take the time to learn about them, you will position yourself well to collect a hefty yield for years to come.
