Due to the volatility of oil and natural gas, the energy sector is characterized by significant fluctuations in profits. As you might expect, that results in significant price fluctuations for many energy stocks. However, there is one relatively boring segment of the broader energy sector: the midstream. If you are looking for no-brainer dividend stocks, this trio of ultra-high-yield midstream players has you covered.
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Why the midstream?
Upstream companies produce oil and natural gas, so their sales and earnings are dictated by the price of the commodities they sell. Downstream companies use oil and natural gas to produce chemicals and refined products, such as gasoline. Their most important inputs are volatile commodities, and many of the products they make are volatile commodities, so that's a double whammy on the income statement.
The midstream, where Oneok (OKE 0.97%), Enbridge (ENB 0.02%), and Enterprise Products Partners (EPD 1.64%) operate, is largely just toll takers. They own the energy infrastructure, including pipelines, that help to move oil and natural gas around the world. They generate reliable fees based on the volume of energy flowing through their energy assets. Demand is a more important factor in their financial results than the price of oil and natural gas.
Energy is vital to the modern world. Energy demand tends to remain fairly strong regardless of the price of oil. Even recessions don't have as big an impact on demand as you might think. This is how Oneok can reliably support its 5.6% dividend yield, Enbridge its 5.8% yield, and Enterprise its 6.8% distribution yield. To provide a comparison point, the S&P 500 index is currently offering a miserly 1.1% yield.
NYSE: OKE
Key Data Points
Impressively reliable income
Oneok has the least impressive dividend track record of the three. The dividend has trended steadily higher throughout the company's history but has experienced a few periods when it remained steady for longer than a year. However, despite the broader volatility of the energy sector, the dividend has not been cut. Enterprise's distribution has been increased annually for 27 consecutive years, and Enbridge's dividend has been hiked every year for three decades.
NYSE: ENB
Key Data Points
Add the income consistency to the lofty yields here, and you can see why these midstream players could be no-brainer investment options. That said, they aren't interchangeable. There are subtle differences that may lead you to pick one over the others.
For example, Oneok and Enterprise are both largely focused on owning midstream assets. However, Oneok is structured as a corporation, and Enterprise is structured as a master limited partnership (MLP). That's part of the reason it has a higher yield, noting that MLPs are designed to pass income on to investors in a tax-advantaged manner. The problem is that MLPs also come with additional tax considerations, like having to deal with a K-1 statement at tax time and the fact that MLPs generally shouldn't be owned in a tax-advantaged retirement account, such as an IRA.
NYSE: EPD
Key Data Points
You may appreciate the higher yield offered by Enterprise, but it may not align with your broader investment goals and tax situation. Enbridge, meanwhile, hails from Canada. Its dividend is paid in Canadian dollars, which means the income U.S. investors receive changes along with exchange rates.
That said, its business is more diverse, including regulated natural gas utilities and renewable power assets, along with the oil and natural gas midstream assets it owns. If you want to focus only on the midstream, it wouldn't be a great option. However, if you like the idea of diversification, it might be a perfect fit.
Similar but different high-yield stocks
If you are in the market for a high-yield stock, you should take the time to look at Oneok, Enterprise, and Enbridge. While they hail from a volatile sector, the income they generate for investors is material and has proven highly reliable over time. They are not interchangeable, so you need to select the one that works best for you. However, all three could be no-brainer solutions for a dividend investor who's in search of a lofty income stream to help pay the bills in retirement.
