Do you like dividend stocks? If so, you should take a closer look at Enterprise Product Partners (EPD +1.28%) and Enbridge (ENB +1.03%) as June gets underway.
They both offer 7%-plus yields backed by reliable businesses and decades of annual disbursement increases. This duo won't excite you, but they will give you a huge stream of passive income to live off of (or reinvest for the future).
The midstream backstory
The energy sector is broken into three broad groupings: upstream (drilling) companies, midstream (pipelines) companies, and downstream (chemicals and refining) companies. The upstream and the downstream are both heavily influenced by commodity prices, but the midstream really isn't. That's because midstream businesses like Enterprise and Enbridge own the energy infrastructure that connects the upstream to the downstream (and to the rest of the world). Midstream companies largely charge fees for the use of the assets they own, so energy demand is more important to their results than commodity prices.
Image source: Getty Images.
That is how, despite wild swings in energy prices over the last several decades, Enterprise managed to increase its distribution for 25 consecutive years. Enbridge has an even better record, with 29 annual payout increases behind it. If you are looking for reliable dividends, investment-grade Enterprise and Enbridge have you covered.
A closer look at Enterprise and Enbridge
Enterprise is a master limited partnership (MLP), which makes owning it a bit more complicated than a traditional company. For example, MLPs don't play nicely with retirement accounts and investors have to deal with a K-1 form come tax time. That said, it offers a hefty 7.2% distribution yield and a portion of the distribution will be shielded from taxes because it will be classified as a return of capital (being an MLP also comes with some benefits).
NYSE: EPD
Key Data Points
Enbridge is a traditional company, but it is based out of Canada. That means that investors have to pay Canadian taxes on the dividends, though those taxes can be claimed back come April 15. Still, for those who prefer to keep things simple, Enbridge will probably be a better option than an MLP like Enterprise. That said, because the dividend is paid in Canadian dollars, the actual income U.S. investors receive will fluctuate with exchange rates. The company's dividend streak is based on its Canadian dollar dividends. Enbridge's yield today is around 7.3%.
What does the future hold for Enbridge and Enterprise?
There's one additional caveat, but it relates to both of these midstream giants. The yield is likely to make up the lion's share of your return over time. That's not going to upset dividend investors who are trying to maximize their passive income stream, but it is worth noting. Growth of the disbursements here will likely be in the low-to-mid single digits over time, driven by contractual rate increases, ground-up construction, and acquisitions.
NYSE: ENB
Key Data Points
The midstream sector in North America is fairly mature, so there aren't a lot of big new projects available, meaning that ground-up construction is more likely to be expansions of existing assets or modestly sized new assets. As for acquisitions, both Enterprise and Enbridge are large enough to be industry consolidators, but it is hard to quantify the timing of acquisitions (or whether any acquisitions will happen at all, for that matter). So the only really reliable driver of growth here is going to be contracted price increases, which are usually very small.
In other words, Enterprise and Enbridge are slow-and-steady tortoises. That's not a bad thing, but it is something that you need to understand upfront. If your investing priorities include growth or rapid dividend growth, you'll want to skip these high-yield midstream opportunities.
June could fill your portfolio with income
Every company comes with some drawbacks and that's true of Enbridge and Enterprise. But if you are looking to maximize the income you collect from your portfolio, both of these high-yielders could be of interest to you. While you could argue that their businesses are very similar, the subtle differences highlighted above will probably make one a better option for you than the other as June unfolds.
