Oil prices have risen dramatically over the last few months as the geopolitical conflict in the Middle East has unfolded. They can swing wildly from day to day on news flow, but they are doing so at an elevated level. If you buy an oil producer, you have to go in with the understanding that oil prices will eventually return to lower levels, as they have after past industry disruptions.
Enterprise Products Partners (EPD +0.25%) lets you sidestep the commodity risk and collect a huge 5.6% distribution yield. Here's why it could be a great energy investment for conservative income investors.
Energy is vital regardless of oil prices
Oil and natural gas are looked down upon because they are carbon based fuel sources. However, they remain vital to the world economy and will likely remain so for decades to come, even as the use of cleaner energy sources grows. Without carbon fuels, the world would grind to a halt. Every investor should have some exposure to the energy sector.
Image source: Getty Images.
The conflict in the Middle East, however, underscores the sector's inherent volatility. And that may put off more conservative investors. But you have options. The sector is generally broken down into three parts: the upstream (production), the midstream (pipelines), and the downstream (chemicals and refining). The upstream and downstream are commodity-driven, but the midstream is fee-based.
Enterprise Products Partners has a great record
In addition to a well-above-market 5.6% yield, Enterprise also has a 27-year streak of annual distribution increases. Its distributable cash flow covers its distribution by a very comfortable 1.7x. And the midstream master limited partnership has an investment-grade-rated balance sheet. Even the most conservative dividend investor should feel comfortable with this high yielder.
NYSE: EPD
Key Data Points
The key to the whole story, however, is Enterprise's business model. It is one of the largest midstream operators in North America. Its portfolio of energy infrastructure assets would be difficult, if not impossible, to replace. And its revenues largely come from fees for the use of its assets, so the price of the products being transported isn't nearly as important as demand. As noted, demand for energy is strong at all times because of the importance of oil and natural gas to the global economy.
Forget about oil prices, buy high-yield Enterprise
If watching the gyrations in energy prices makes you queasy, you probably shouldn't buy an oil stock today. If history is any guide, the high prices won't last. But when oil prices do, eventually, fall, Enterprise's distribution will still be well supported by its fee-generating business. Buy it, and you can sleep well at night, focusing on your distribution checks while happily forgetting about oil prices.
