There is one key feature that all investors need to know about the energy sector: The commodity-driven sector can be very volatile. Or, at least, most of it can. There's one niche that actually has a pretty consistent history of reliability, particularly with regard to dividend stocks.
This is why even conservative dividend investors will likely find Enterprise Products Partners (EPD +0.75%) and Enbridge (ENB +0.39%) attractive high-yield energy stocks to buy. Here's what you need to know.
Happily struck in the middle
The energy sector is usually broken down into three subsegments. There is the upstream, which produces oil and natural gas. There is the midstream, which transports oil, natural gas, and the products into which they get turned. And there is the downstream, which processes oil and natural gas into other products, like chemicals and gasoline.
Image source: Getty Images.
The revenues in the upstream are entirely dependent on volatile oil and natural gas commodity prices. There's a similar dynamic in the downstream, since many of the products produced are commodities. However, there's another level of complexity here on the cost side, since oil and natural gas are key inputs. The sole oddity is the midstream, which normally just charges fees for moving commodities from one place to another.
The up-front costs to build midstream assets, like pipelines, is fairly large. But once built, the toll-taker model employed generally produces reliable cash flows. Demand for oil and natural gas is more important than the price of oil and natural gas. And since energy is so vital to modern society, demand tends to remain robust even when oil prices are low. Enterprise and Enbridge are both midstream businesses.
NYSE: EPD
Key Data Points
Dividends tell the important story
Just how reliable are Enterprise and Enbridge as dividend stocks? Enterprise, which is a master limited partnership (MLP), has increased its distribution for 26 consecutive years. Enbridge, a Canadian company, has increased its dividend annually for three decades. These are market-proven histories, noting that the energy sector has gone through multiple downturns over the past quarter-century.
Right now, Enterprise is offering a distribution yield of 6.8%, while Enbridge has a dividend yield of around 5.9%. Both are well above the market and the broader energy industry. However, those lofty yields will likely make up the lion's share of return here. Slow and steady growth is the norm, but dividend investors probably won't find that trade-off too upsetting.
NYSE: ENB
Key Data Points
While similar, Enterprise and Enbridge are not perfectly interchangeable. As noted, Enterprise is an MLP, a type of corporate structure that comes with some tax complications (notably having to deal with a K-1 statement on April 15). Enbridge, meanwhile, is Canadian, so its dividend is paid in Canadian dollars (what U.S. investors collect will change with exchange rates), and investors will have to pay Canadian taxes on the dividend (a portion of that can be claimed back come April 15).
That said, Enterprise is also more focused on oil and natural gas assets than Enbridge. In fact, Enbridge's specific goal is to adjust its business along with the world's energy needs. So it has been increasingly shifting toward natural gas, including buying natural gas utilities, and it has a small, but growing, clean energy business. Enbridge is probably the more conservative of these two midstream choices.
Buy and hold for the long term
The big theme here, however, is that Enterprise and Enbridge are high-yield investments with reliable businesses that can pay you for years into the future. They aren't the kind of stocks you buy and sell frequently; they are the kind you buy and hold for the long term. That way, you benefit from the slow and steady growth of the dividend, as these reliable income investments keep pumping out cash from what is otherwise a highly volatile industry.
If you are looking to boost your investment income in June, Enterprise and Enbridge should be on your list of options.
