If you had invested $10,000 in Enterprise Products Partners (EPD 0.45%) three years ago, your investment would have grown to close to $15,400 today. That's a return most investors would likely love to get over such a short period.
A large chunk of those gains would have stemmed from Enterprise's distribution, which currently yields over 7.8%. Without the distributions, your initial $10,000 investment would be worth only around $12,300.
You can't go back in time to make money by investing in Enterprise Products Partners. However, I think the midstream energy company is a great pick for investors now. Here are seven reasons why buying this 7.8%-yielding dividend stock could be a brilliant move.
1. That ultra-high distribution yield
I'll start with the obvious reason to buy Enterprise Products Partners -- that ultra-high distribution yield. A juicy yield is nothing new for the stock, by the way. Enterprise's distribution yield has topped 6% throughout most of the company's history.
2. An impressive track record of distribution increases
I'd argue that Enterprise Products Partners' track record of distribution increases is even more impressive than its high yield. The company has increased its distribution for a remarkable 25 consecutive years.
We're not talking about paltry distribution hikes, either. Enterprise's distribution has increased by a compound annual growth rate of roughly 7%.
3. A resilient business
Speaking of impressive track records, Enterprise Products Partners' business has demonstrated tremendous resilience through the years. That's especially noteworthy because of the inherent volatility in the energy sector.
For example, Enterprise delivered a double-digit return on invested capital (ROIC) in every year since 2005. This period included the financial crisis that began in 2007, the oil price collapse from 2014 through 2017, and the COVID-19 pandemic.
4. Solid financials
Past success wouldn't mean a thing if Enterprise Products Partners was on shaky financial ground now. However, the opposite is true.
Enterprise remains highly profitable, generating $1.6 billion in earnings and over $2 billion of distributable free cash flow in the fourth quarter of 2023. Its balance sheet is strong, with a leverage ratio of 3x and solid A- and A3 credit ratings.
5. An attractive valuation
It isn't just income investors who will find plenty to like about Enterprise Products Partners. Value investors should like the stock too. Enterprise's forward earnings multiple currently stands below 9.8x. By comparison, the S&P 500 energy sector as a whole trades at nearly 11.9 times forward earnings.
6. The company is investing for growth
Enterprise Products Partners isn't a growth stock. However, the company continues to invest in ways that should drive future growth. For example, Enterprise is constructing multiple natural gas liquids (NGL) plants in the Midland Basin and Delaware Basin that are expected to go into service in 2024 and 2025.
7. Better industry growth prospects than you might think
Last, but not least, there are better growth prospects for the midstream energy industry than you might think. Global energy use increases with world population growth and the expansion of industrialization. Although renewable energy sources will be increasingly important, the demand for fossil fuels -- especially natural gas and NGLs -- will rise over the next several decades based on U.S. Energy Information Administration forecasts.
One drawback to keep in mind
There's one drawback with investing in Enterprise Products Partners to keep in mind. The company is organized as a limited partnership (LP). That means it issues K-1 tax forms, which make tax preparation more complicated. However, I think the many advantages that investing in this midstream energy stock offers easily outweigh this tax-related downside.
