For the bulk of the 21st century, buybacks have been corporate America's preferred way of returning capital to shareholders, but S&P 500 dividend growth has been solid, if not awe-inspiring. Savvy equity income investors know that some segments deliver the dividend goods more than others. Those groups include energy stocks.
Taking things a step further, pipeline stocks are known for offering tempting yields and, in many cases, dependable payout growth. Enterprise Products Partners (EPD +0.66%) checks those boxes. Although the third quarter isn't even half over, it's already brought a spate of midstream dividend hikes, with Enterprise Products being one of the guests at that party.
Enterprise Products is one of the dividend leaders in the midstream segment. Image source: Getty Images.
On July 7, the pipeline operator told investors that the dividend it's delivering Aug. 14 represents a 2.8% year-over-year increase. As of Aug. 3, the stock yields 5.8%. That's more than 5x the dividend yield on the S&P 500, and more than double the yield of the largest energy exchange-traded fund (ETF). Fortunately, that's not the end of the good news when it comes to the Enterprise Products dividend.
A dependable pipeline payout
Not all oil stocks are cut of the same dividend cloth. In the energy patch, there are low yields, alarmingly high yields, and a lack of dividend clarity. Enterprise Products doesn't wear any of those dubious labels. Twenty-eight consecutive years of increased distributions confirm that this is a dependable equity income name.
Fundamentals indicate that the streak can be extended over the long haul. Income investors assessing Enterprise Products today can benefit from valuable insight provided by the company when it delivered second-quarter earnings on July 30. For those who don't want to get "in the weeds," the dividend is safe. For investors demanding more detail, here goes.
In the June quarter, this pipeline operator generated a record $2.3 billion in operational distributable cash flow (DCF), resulting in coverage of 1.9x the distributions paid during that period. Enterprise Products also retained $1.1 billion of that DCF.
NYSE: EPD
Key Data Points
Here are two more points that dividend investors will like. First, the midstream company repurchased $159 million worth of its stock during Q2. Fewer shares outstanding reduce a company's dividend obligations because dividends aren't paid on retired shares. Second, the 56% payout ratio isn't demanding given rising DCF and declining shares outstanding.
Long-term allure
Pipeline stocks, including Enterprise Products, are often calmer than their integrated and exploration and production peers, implying it's advisable to approach midstream equities with long-term perspectives.
With Enterprise Products, investors should consider that approach because the true value of dividend growth is realized over longer holding periods. Additionally, the company is just beginning to realize benefits from new projects, including increased volumes in the pipeline and at marine terminals.
Those volume increases, combined with higher marketing volumes and margins, supported Q2 earnings and cash flow growth. Margin expansion was evident in Enterprise Products' natural gas liquids (NGLs) segment, where the company has industry-leading export infrastructure. That underpins Enterprise Products' status as a wide-moat midstream operator, potentially bolstering the stock's long-term bull case.
