There are no sure things in investing. However, Enterprise Products Partners (EPD 1.22%) has been as bankable as they come. The master limited partnership (MLP) has increased its cash distribution to investors every year since its initial public offering (26 years in a row).
The MLP's payout currently yields more than 7%. At that rate, it could turn a $1,000 investment into a more-than-$70 annual passive income stream. That big-time income stream should continue rising in the future. These features make it an excellent investment option for those desiring income and who are comfortable with receiving a Schedule K-1 federal tax form that MLPs like Enterprise send to their investors each year.
A cash flow-generating machine
Enterprise Products Partners operates a diversified portfolio of midstream assets. These businesses generate very stable cash flow, with most coming from long-term, fixed-rate contracts and government-regulated rate structures. Over the last 12 months, the MLP has produced $8.4 billion of adjusted cash flow from operations.
The company distributed about $4.4 billion of this cash to investors, giving it a roughly 52% payout ratio. That's a very conservative level for a pipeline company. It enables the MLP to retain significant free cash flow to fund expansion projects, repurchase its units, and maintain a strong balance sheet. It has made $4.1 billion in capital investments over the past year and $200 million in unit repurchases.
Enterprise's durable cash flows and low payout ratio help it maintain a strong balance sheet. It has a low 3.0 leverage ratio and one of the highest credit ratings in the midstream sector.
The midstream company's combination of stable cash flows, low payout ratio, and low leverage level put its 7%-yielding payout on a rock-solid foundation.
Lots of growth is coming down the pipeline
Two factors have helped fuel Enterprise Products Partners' dividend growth engine over the years: organic capital projects and accretive acquisitions. The MLP routinely invests billions of dollars each year into organic growth projects, including $3.5 billion over the last 12 months to finish construction on projects like its Leonidas and Mentone 3 gas processing plants and Texas Western Products System. Those projects have helped fuel an 11% increase in its adjusted cash flow from operations in the second quarter. That growing cash flow has allowed it to increase its distribution by 5% over the past year.
Enterprise Products Partners currently has $6.7 billion of major capital projects under construction and more under development. Notable projects it's currently building include its Mentone West and Mentone West 2 gas processing plants, Bahia natural gas liquids pipeline, and several export capacity expansion projects. These projects should come online through the end of 2026, providing lots of visibility into future cash flow growth. That growing cash flow should enable the MLP to continue increasing its distribution.
The MLP will also make accretive acquisitions as opportunities arise. For example, it recently agreed to buy Pinon Midstream in a $950 million deal. The acquisition will enhance the company's capabilities due to Pinon's specialized treating assets. Meanwhile, it will be highly accretive to the midstream company's distributable cash flow. It will add $0.03 per share in the first year, with more in the future as it captures commercial and operating synergies.
That deal was Enterprises' second of the year (it also bought $400 million of joint venture interests from fellow MLP Western Midstream). The company has a strong balance sheet, giving it ample financial capacity to continue making deals as attractive opportunities arise.
A powerful and growing passive income stream
Enterprise Products Partners has an elite record of increasing its distribution. The company's high-yielding payout is on a rock-solid foundation and should continue heading higher in the future. Because of that, it's a great passive income investment.
