Midstream companies have some of the best dividends among energy stocks. Their dependable toll-like revenue streams provide steady cash flow, allowing them to deliver predictable dividend increases.
Even among midstream companies, Energy Transfer (TXSE: ET) and Enterprise Products Partners (EPD -1.82%) stand out. They have two of the sector's best dividend yields and enticingly low valuations, making them more attractive to income-oriented investors.
Energy Transfer's dividend is 6.65% at its current share price, while Enterprise Products Partners is 5.98%. Their trailing price-to-earnings (P/E) ratios are around 13 times earnings, while their forward P/Es are around 12 times earnings, well below their peers' multiples.
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Why Energy Transfer is a good buy now
The Dallas master limited partnership operates more than 140,000 miles of pipelines across 44 states. It is expanding to meet the growing demand for natural gas liquids (NGL) for large data centers and power plants and is in the process of buying midstream services company Vaquero Midstream for $2.65 billion. The move is intended to improve Energy Transfer's integrated natural gas gathering and processing network.
Energy Transfer has one of the fastest-rising dividends in the energy sector, having increased its dividend for 19 consecutive quarters, including a 3% raise in the second quarter. One concern is that its cash dividend payout ratio is around 90.14%, which looks high. However, the company grew its distributable cash flow (DCF) by 32% year over year in the second quarter to $2.59 billion. That means its DCF distribution ratio is only around 43%.
The company reported second-quarter revenue of $34.3 billion, up 78.4%, year over year, and earnings per share (EPS) of $0.59, an increase of 84.4% over the same period a year ago.
TXSE: ET
Key Data Points
Why Enterprise Products Partners is a good buy right now
The Houston-based midstream company operates liquid storage facilities, marine export terminals, and more than 50,000 miles of pipelines to transport energy products. It reported record numbers in the second quarter, thanks mainly to record volumes going through its pipelines.
In the second quarter, it reported record revenue of $18.3 billion, up 60.7% year over year. EPS was $0.84, up 27.3% over the same period a year ago. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose 17%, year over year, to a record $2.8 billion.
The company has increased its quarterly dividend for 28 consecutive years, including a 2.8% bump this year to $2.24 per share. It also had a record DCF of $2.3 billion in the quarter, up 21% year over year, and provided 1.9x coverage of the dividend.
NYSE: EPD
Key Data Points
Business is booming, but...
Midstream stocks are having a moment right now because of record-high volumes, with the growth of data centers leading the way. That has meant strong growth for Energy Transfer and Enterprise Products Partners. Based on their recent success, both stocks remain underpriced relative to competitors' valuations.
However, if you need to choose between the two, Energy Transfer's growth has come at a greater price, and its trailing debt-to-equity ratio of 4.1 makes it a riskier pick than Enterprise Products Partners -- and that was before Energy Transfer's proposed purchase of Vaquero.
