It's a dividend investor's dream ... or is it?
Enterprise Products Partners (EPD +0.54%) is currently offering a juicy 6.8% yield, and is widely regarded as one of the best-run companies in its sector. That said, there are a couple of things that investors should know before buying shares of this high-yielding dividend juggernaut, particularly investors who do their own taxes.
Here's the essential pre-purchase primer for this shareholder-friendly company.
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Know the industry
Enterprise is a midstream energy company, but unless you're well-versed in energy stocks or the oil and gas industry, you may not know what that term means.
Basically, the oil and gas business is divided into three "streams." "Upstream" refers to exploration and production (the actual drilling). "Downstream" refers to refining and marketing (like selling fuel at a gas station). In between, there's the "midstream," which refers to transportation and storage.
Midstream energy companies own infrastructure assets like pipelines, storage tanks, and export terminals, which are used to transport and store either unrefined oil and gas or refined fuel products (or both). Midstream companies can focus on a particular type of product, like gas instead of oil, or they can take a diversified "all of the above" approach. Enterprise is one of the latter.
Know how it makes money
Enterprise owns some long-haul pipelines that transport crude oil and natural gas, but most of its assets are focused on natural gas liquids (NGLs), like propane and butane. The company owns a vast network of NGL pipelines and storage and processing facilities in Texas and Louisiana. It makes money by charging upstream or downstream companies a fee to use its infrastructure to transport, process, and store their products.
Generally speaking, those upstream and downstream customers enter into long-term contracts with Enterprise to purchase capacity on their pipelines and in their terminals. If a customer doesn't use the capacity it's purchased, it still has to pay. That provides Enterprise with a steady long-term stream of dependable, recurring revenue, which it uses to fund its generous payout.
NYSE: EPD
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Know how it affects your taxes
Speaking of the payout, Enterprise can offer such a generous dividend because it's organized as a master limited partnership (MLP). MLPs receive favorable tax treatment in exchange for paying out almost all of their operating cash flow as dividends to their shareholders.
However, that payout can come with some extra red tape. Unlike most stocks, MLP income is reported on a K-1 form, which can require extra effort at tax time, especially if your shares are held in a non-tax-advantaged account. Be sure you're aware of the tax reporting requirements for your particular situation before buying shares.
That said, if you don't mind a bit of extra paperwork, Enterprise is an excellent choice for sustainable dividend income in the energy sector.
