Some say that buy and hold is dead. That the market is too complex now and that we have too much volatility for such an old strategy to work anymore. And yet when we look at historical data we can find a number of companies that have rewarded buy and hold investors for their patience. One such company is midstream operator Enterprise Products Partners L.P. (NYSE:EPD). The pipeline and processing company has slowly and steadily grown throughout the years turning a small investment into a nice nest egg. It's poised to do the same to the next generation of buy and hold investors as a small initial investment to buy 100 units today could turn into a $60,000 nest egg three decades from now. Here's how.
A trip down memory lane
Since going public in 1998, Enterprise Products Partners has created a lot of wealth for its investors. As we see on the following chart, the company's units have appreciated in value by more than fourfold.
As we see on the chart units are up 491% in just over 17 years. That has pulverized the return of the market as the S&P 500 is only up 81% over that same time frame. Even better, when we add in the company's cash distributions its total return since going public is 1,600% while the market's total return is just 143%.
Still more to come
Since going public Enterprise has been one of the best performing investments on a total return basis. As we see on the following slide the company has delivered very robust annualized total returns and it has beaten every other asset class over the trailing 15, 10, five, and three year period.
One of the reasons the company's return has been so strong is because it has been able to grow its asset base as it has bought or built a number of fee-based energy infrastructure assets over the years. These assets have brought in a growing stream of stable cash flow, which has allowed Enterprise to boost its cash distribution to investors for 42 straight quarters and a total of 51 times since going public. Overall, the distribution is up 356% in 17 years and its most recent increase was 5.7% higher than the previous year's payout.
Because of this we could make the case that the company should deliver above average total returns in the years ahead. However, given the caveat that "past results may not be indicative of future performance" it's best to be as conservative as possible when making future assumptions. The good news is that even using very conservative estimates an investor buying 100 units of Enterprise today -- costing around $3,200 -- could conceivably end up with a nearly $60,000 nest egg in 30 years thanks to the power of compounding.
Now, that chart is really for illustrative purposes, but under these conservative assumptions an investor buying 100 units of Enterprise today for $3,200 would end up with 261 units in 30 years. If the company is able to raise its distribution by 5% per year while units appreciate by 7% per year, these units would be worth an estimated $228 per unit or a total of $59,346.83. If that conservative assumption proves correct, then in 30 years the investment would be throwing off $1,588 in income each year, which could then be used for retirement expenses.
That's not a bad nest egg and could be much higher if Enterprise performs as well in the future as it has in the past. Or, of course, it could be quite lower if the company fails to live up to its historical success. That said, the odds are in its favor that it can continue its past success as the company's business of operating pipelines and processing plants is one that has enormous growth potential given stunning oil and gas resources that energy companies have unlocked in shale plays around the country over the last few years. In fact, according to analysts, companies like Enterprise actually need to triple the annual amount invested in energy infrastructure over the next two decades, which suggests even stronger future growth for Enterprise.
Don't listen to those that say buy and hold is a thing of the past as I think they're sadly mistaken. As someone who has held units of Enterprise for several years now I've enjoyed the steady appreciation in the unit prices as well as the strong income growth. I plan to keep holding on another few decades in hopes that this investment is one of my golden nest eggs funding my golden years.
Matt DiLallo owns shares of Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.