The average energy stock has a yield of around 3.6%. You can do way better than that with either Enbridge (ENB 0.60%) or Enterprise Products Partners (EPD -0.59%), which at this writing yield 6% and 6.8%, respectively. Those lofty yields, however, aren't a sign of risk. They are actually a no-brainer opportunity to add two reliable and growing income streams to your dividend portfolio.
Here's what you need to know.
Image source: Getty Images.
Oil is a volatile commodity
The energy sector is known for its volatility, thanks to the commodity nature of the products it produces. At the beginning of the chain is oil and natural gas, which can and do see swift and dramatic price changes both up and down. At the end of the chain are chemicals and refined products, which use volatile oil and natural gas as inputs for products that themselves are often volatile commodities. These segments of the energy sector are known as the upstream and downstream, respectively.
If you are going to invest in the energy sector the one thing you need to understand is that volatility is the norm. At least it is the norm for the upstream and the downstream. There's another industry segment known as the midstream that doesn't operate with the same dynamics. The midstream simply connects the upstream and downstream to each other and the rest of the world. Midstream companies generally charge fees for moving oil, natural gas, and the products into which they become.
Midstream businesses like Enbridge and Enterprise Products Partners own energy infrastructure like pipelines, storage, processing, and transportation assets. The world simply can't get the energy it needs without these physical assets, so the fees midstream companies produce tend to be fairly consistent regardless of whether oil prices are high or low. Demand is the more important determinant of success for midstream operators.
Enbridge and Enterprise are midstream giants
Whether you are looking at the midstream sector when energy prices are relatively weak like today or you are considering them when energy prices are high, the story doesn't materially change. The proof of that comes from the three-decade streak of annual dividend increases that back's Enbridge's lofty dividend yield. And the 26-year streak of distribution hikes that back's Enterprise's yield.
Those yields are also backed by strong balance sheets. Enbridge's credit rating is BBB+. Enterprise's credit rating is one step higher on the scale at A-. There is plenty of financial leeway for both of these midstream players to support their disbursements even if they face some headwinds.
Given the high yields, the income Enbridge and Enterprise generate is likely to make up the vast majority of most investors' total returns. That's probably not going to bother dividend-focused investors. But slow and steady growth in the income stream you collect is highly likely, too, given the regular fee increases and capital investments that these businesses make over time. All in, these are no-brainer, high-yield energy stocks if you are an income investor.
They aren't exciting and that's the point
Owning an oil producer can be a harrowing affair, with stock prices often rising and falling just as quickly and dramatically as oil prices. Most dividend investors will be better off with relatively boring midstream businesses. And in this niche of the energy sector, Enbridge and Enterprise stand out for their size, financial strength, and the consistency with which they have rewarded income investors. You should consider buying them right now if you want to add an energy stock to your portfolio.
