The big attraction at Enterprise Products Partners (EPD -0.10%) is the master limited partnership's (MLP's) huge 6.8% yield. But a high yield alone doesn't make an investment a good choice for dividend investors. All you have to do is look at high-yield Devon Energy's (DVN 0.71%) dividend history, and you can see that. Here's why 2023 proved that Enterprise Products Partners, and its high yield, is a dream come true for conservative dividend investors interested in the energy sector.
What does Enterprise do?
The term energy sector is a broad catch-all phrase. There are actually three segments to the energy sector: the upstream, midstream, and downstream. The differences are really important to understand if you are looking to own a consistent dividend payer.
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The upstream segment produces oil and natural gas. These are commodities prone to swift and often dramatic price changes. Since selling these commodities is what drives financial results in the upstream sector, producers like Devon Energy tend to have volatile earnings. The downstream is where chemical and refining companies live. Oil and natural gas are inputs, so these businesses can benefit from low energy prices (high energy prices, meanwhile, are a headwind). However, the products they make out of oil and natural gas are often commodities, too. So, earnings can be just as volatile in the downstream as in the upstream.
The midstream is different. The midstream is filled with companies that own the energy infrastructure, like pipelines, that moves oil and natural gas, and the products into which they get turned, around the world. This is where Enterprise Products Partners operates, with one of the largest portfolios of energy infrastructure in North America. It largely charges fees for the use of its assets, so demand for energy is more important than the price of the commodities going through its system.
That changes the dividend equation in a very important way. With reliable cash flows, Enterprise can afford to pay out more cash to unitholders. And it can more comfortably increase distributions as its business grows via capital investments, acquisitions, and contractual price increases. At this point, Enterprise has increased its distribution annually for 25 consecutive years at a compound annual growth rate of 7% (more recent increases have been in the low to mid single digits, which is probably a more realistic run rate).
Enterprise: 2023 was a great example
That's all big-picture stuff; what does it mean for investors? Well, 2023 was a good year to examine. During Enterprise's fourth-quarter 2023 earnings conference call, management noted that natural gas prices were lower by nearly 60% in 2023. Oil prices fell almost 20%. Propane dropped by 36%. And ethane declined a huge 50% or so. These are all products that Enterprise moves through its midstream business.
Let's focus on oil and natural gas, which are Devon Energy's products. Devon has adopted a variable dividend policy so that higher energy prices lead to dividend increases, and lower prices lead to dividend cuts. In 2023, Devon paid a first-quarter dividend of $0.89 per share, followed by $0.72 in the second, $0.49 in the third, and it capped the year off with a $0.77 quarterly dividend. That's a lot of variability, but it makes logical sense, given the dividend policy and the inherent volatility of oil and natural gas prices.
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Enterprise's distribution in the first two quarters of 2023 was $0.49 per unit, which was increased to $0.50 per unit in the final two quarters of the year. In other words, despite what was a difficult year for energy prices generally, highlighted by the variability in Devon's dividend, Enterprise's distribution didn't skip a beat. But the story gets even better: The consistent cash flow Enterprise generates from its toll-taker business model was supported by 13 operating records in 2023 (in other words, it handled record levels of product moving through its system). Basically, despite weak prices, demand for the MLP's infrastructure was robust.
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To be fair, Enterprise's earnings were basically flat year over year, but that's still pretty impressive, given the variability in energy prices. For conservative dividend investors, such consistent performance can help make sleeping at night a lot easier, particularly if you are trying to live off of the income your portfolio generates.
There are other reliable options, but Enterprise stands out
There are plenty of dividend choices in the energy patch, including ExxonMobil and Chevron, which have both increased dividends annually for decades. However, the earnings swings at these two energy giants can be huge. Enterprise's results are a lot smoother, which is a function of both its midstream focus and management's business approach. Add in a steadily growing distribution, and Enterprise seems like the better choice for investors looking for a reliable and high-yield energy investment. In other words, consider adding Enterprise and its lofty 6.8% distribution yield to your portfolio today.
