What does it take to generate passive income? There are two essential ingredients. First, you need up-front money to invest. Second, you need an investment that regularly pays you.
The good news is that many investment alternatives pay you for owning them. There's one, in particular, that ranks among the best options, in my view. This high-yield dividend stock is a monster passive income machine.
A pipeline powerhouse
Enterprise Products Partners (EPD -0.24%) is a leading midstream energy company. It was founded in 1998 and is based in Houston.
The limited partnership (LP) operates more than 50,000 miles of pipeline that transports natural gas liquids (NGLs), natural gas, and crude oil throughout much of the U.S. Enterprise's midstream platform also includes over 300 million barrels of liquids storage, 42 natural gas processing trains, 26 fractionators, 20 deepwater docks, two propane dehydrogenation facilities, and two isobutane dehydrogenation facilities.
Enterprise isn't resting on its laurels. The company has roughly $6.5 billion of major projects under construction. Most are NGL-related, including new plants in the Delaware and Midland Basins and the Bahia pipeline.
Investors can rest assured Enterprise Products Partners deploys its cash wisely. The LP has delivered an average return on invested capital (ROIC) of 12% over the last 10 years. Its ROIC has also been in the double digits every year since 2005 -- a period that included the Great Recession, the oil price collapse of 2014 to 2017, and the COVID-19 pandemic.
A passive income machine that's priced attractively
What about passive income? Enterprise Products Partners provides plenty of it. The company's distribution yield currently tops 7%. For every $10,000 you invest, you'll receive an annual income of over $700.
That income is likely to grow over time. Enterprise Products Partners has increased its distribution for 25 consecutive years with a compound annual growth rate of around 7%.
I'm confident the LP will keep that impressive streak going, too. Enterprise's adjusted cash flow from operations (CFFO) continues to grow. It's the only midstream company that has consistently increased adjusted CFFO per unit and reduced unit count without any material asset sales.
Servicing debt shouldn't disrupt Enterprise Products Partners' distribution payouts either. The company manages its debt well. And it's the only midstream debt issuer with an A- credit rating.
As a bonus, Enterprise is priced attractively. Its units trade at 10.9 times forward earnings. That's well below the S&P 500 energy sector's forward earnings multiple of nearly 13.3.
One drawback
Some might think Enterprise Products Partners' focus on fossil fuels could limit its growth. However, I don't see that as a downside. The demand for natural gas and NGLs, in particular, should continue to grow. Enterprise's midstream assets will be needed for a long time to come.
There is one drawback to investing in Enterprise, though. LPs must provide each unitholder with a Form K-1. This can make tax preparation more of a hassle.
