When interest rates spiked in 2022 and 2023, many income investors rotated from high-yield dividend stocks toward safer CDs and T-bills for comparable or higher yields. But as interest rates decline, those investors will likely pivot back toward high-yield stocks again.
Many energy stocks pay high yields, but they're mostly cyclical. Therefore, buying an energy stock at the wrong time could easily wipe out any gains from its distributions or dividends. However, there are still some less cyclical energy plays that are built to generate steady income for their investors while withstanding economic downturns.
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Two of those reliable high yielders are Energy Transfer (ET 0.23%) and Enterprise Products Partners (EPD -1.52%), which pay hefty forward yields of 7.6% and 7%, respectively. Over the past decade, a $10,000 investment split evenly between those two stocks would be worth more than $17,800 today after reinvesting their dividends. Let's see why both stocks could still be a safe place to invest $10,000 over the next few decades.
The similarities and differences between these two pipeline leaders
Energy Transfer and Enterprise are both midstream pipeline companies that operate as master limited partnerships (MLPs). MLPs blend the tax advantages of a private partnership with the liquidity of a public stock, report their profits as earnings per unit (EPU), and pay out distributions (which include a return of capital) instead of dividends.
Energy Transfer operates more than 135,000 miles of pipeline across 44 states, while Enterprise operates over 50,000 miles of pipeline in 27 states. Both companies transport natural gas, natural gas liquids (NGLs), crude oil, and refined products through their pipelines.
Energy Transfer also expanded into the gas station market with its acquisition of Sunoco in 2012, and it exports its NGL and liquefied natural gas (LNG) overseas. Enterprise doesn't operate any retail fuel stations. It exports some NGLs, but it doesn't export any LNG yet.
As pipeline companies, Energy Transfer and Enterprise are both well insulated from volatile commodity prices because they simply charge "tolls" for using their infrastructure. However, Energy Transfer's smaller retail fuel segment is still exposed to fluctuating crude oil prices.
Energy Transfer expanded with bigger and more aggressive acquisitions than Enterprise over the past decade. As a result, Energy Transfer is shouldering a lot more debt than Enterprise, which generally favors more conservative growth strategies. Energy Transfer has also triggered more controversies with its rapid expansion (including a protracted conflict regarding its Dakota Access Pipeline), while Enterprise hasn't faced as much resistance from environmental regulators.
How sustainable are their distributions?
Energy Transfer's annualized distributions per unit (DPU) fell from $1.22 in 2019 to $1.07 in 2020 and $0.61 in 2021. That decline was caused by the pandemic, its rising expenses, and the debt it accumulated from its aggressive expansion strategies. However, it subsequently raised its annualized EPU to $0.98 in 2022, $1.22 in 2023, and $1.30 in 2024 as it overcame those challenges. Its annualized distributable cash flow (DCF) -- which covers its distributions -- also stayed well below its total annualized distributions over the past five years. In 2024, its $4.4 billion in distributions only accounted for 53% of its annualized DCF of $8.4 billion.
Enterprise hasn't reduced its distributions over the past two decades. Its DPU consistently rose from $1.77 in 2019 to $2.10 in 2024. That consistent growth reflects its tighter financial discipline and more conservative growth strategies. Like Energy Transfer, Enterprise easily covered its distributions with its DCF. In 2024, its $4.6 billion in distributions accounted for 55% of its annualized DCF of $8.4 billion.
Therefore, both companies can still easily cover their high distributions. However, investors who prefer more predictable returns might favor Enterprise over Energy Transfer, while growth-oriented investors might prefer Energy Transfer's more ambitious expansion strategies.
How cheaply valued are they relative to their growth potential?
From 2024 to 2027, analysts expect Energy Transfer and Enterprise to grow their EPU at a CAGR of 9% and 5%, respectively. Energy Transfer's growth should be driven by its ongoing expansion in the Permian Basin, the integration of its recent acquisitions, and the completion of its LNG export project at Lake Charles, Louisiana. Enterprise's growth should be fueled by its Permian Basin processing plants, its Bahia NGL pipeline, and its expansion plans in Mont Belvieu and Orange County in Texas.
Both stocks still look cheap relative to their growth potential: Energy Transfer and Enterprise's shares trade at just 12 and 11 times this year's EPU, respectively. If you're looking for two high-yield energy stocks that aren't too exposed to volatile commodity prices, you should add Energy Transfer and Enterprise to your portfolio.
