If you have $500 and want to generate some income with that cash, one of the first places you should look is Enterprise Products Partners (EPD +1.19%). A big reason why is the huge 7.1% yield on offer at a time when the broader market is yielding just 1.2% and energy stocks in general just 3.1%.
But the high yield is not the only reason to love Enterprise Products Partners.
What does Enterprise Products Partners do?
The energy sector is broad, comprised of companies that drill for oil and natural gas, companies that transport the fuels, and others that process these vital energy sources into chemicals and other refined products. The industry is broadly broken down into the upstream, midstream, and downstream sectors. Each operates very differently, with performance in the upstream and downstream tending to be commodity-driven.
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Enterprise Products Partners operates in the midstream, with a portfolio of energy transportation infrastructure, like pipelines, in North America that would be difficult to replace or replicate. The midstream basically helps connect the upstream and the downstream, effectively offering a transportation service. Midstream companies like Enterprise tend to charge fees for the use of their assets, which generates consistent cash flows over time.
This makes it possible for Enterprise to pay, and support, a large and growing distribution. Notably, despite the volatility of the broader energy sector, this master limited partnership (MLP) has increased its distribution annually for 26 consecutive years.
NYSE: EPD
Key Data Points
No reason to think Enterprise's streak will end
Because of the vital nature of Enterprise's assets, its services are likely to be needed as long as oil and natural gas are needed. Global energy giant ExxonMobil recently highlighted that these fuels are likely to remain important for decades to come, with demand in 2050 projected to be equal to around half of the world's energy needs. So, from a fundamental position, Enterprise's assets will still be in high demand for a long time.
Then there's the partnership's financial situation. It has an investment-grade-rated balance sheet and its distributable cash flow covers the distribution by 1.7 times. That's a very solid foundation, suggesting that there's a lot of room for adversity before a distribution cut would be in the cards.
The only problem with Enterprise is growth, given that there's limited opportunity for ground-up capital investment in the midstream space. However, this industry giant is large enough and financially strong enough to act as an industry consolidator. In fact, it just agreed to buy Piñon Midstream for just under $1 billion. This shows that Enterprise can find a way to keep growing even as the energy industry changes shape over time.
Who should buy Enterprise Products Partners stock?
That said, Enterprise Products Partners is not going to be a great fit for every investor. For starters, distribution growth is likely to be slow and steady. Think low- to mid-single digits. That's likely to be enough to keep up with the impact of inflation and increase the buying power of the distribution, slightly, over time. But this is not a dividend growth investment or a growth investment. The real attraction here is for investors looking to generate a large stream of current income, perhaps to help pay for expenses in retirement.
There is one alternative view, however, if you reinvest dividends. From a total return perspective, compounding the big yield along with the slow and steady distribution growth will get you up to around the 10% return that most expect from the broader market. And from a reliable and relatively safe investment. All in, however, the distribution is going to be the key to assessing Enterprise's attractiveness as an addition to your unique portfolio.
