Oil and gas pipelines are vital to the American economy. Because of that, the country has 185,000 miles of liquid petroleum pipelines along with another 320,000 miles of natural gas transmission pipelines. That's a lot of pipe, and if laid end to end, these pipelines would circle the earth more than 20 times. These pipelines ensure that oil, gas, and other hydrocarbons get from production basins to market centers so our economy has the fuels it needs to drive our modern society forward.
The companies that build and operate these pipelines typically charge a fee for capacity on a pipeline, similar to a toll road. As such, these companies earn very stable revenue, much of which is typically returned to investors via very generous dividends. Here's a look at some of the very best high-yield stocks in each pipeline category.
Natural gas and NGL pipelines
As previously mentioned, there are 320,000 miles of natural gas transmission pipelines in this country. About 67,000 miles of those pipelines are owned and operated by Kinder Morgan (NYSE:KMI), which has the largest natural gas pipeline network in North America. In fact, the company transports up to a third of America's natural gas in any given day. Kinder Morgan is diversified beyond natural gas pipelines; however, that business is the main driver of its earnings: It represents more than half of its total earnings. Moreover, it's a very stable set of earnings, which the company uses to help fuel its generous 4.2% dividend.
Another pipeline stock largely fueled by natural gas is Energy Transfer Partners (NYSE:ETP), which, once its merger with affiliated Regency Energy Partners (NYSE:RGP) closes, will own and operate 60,700 miles of natural gas and natural gas liquids, or NGL, pipelines. The combined company will be the second largest transporter of natural gas in the U.S., as well as the third largest gathering and processing company and the third largest NGL producer. Even better, because of its MLP structure, the entity pays a much higher dividend than Kinder Morgan, at 7.2%.
Another large natural gas and NGL-focused pipeline stock is Enterprise Products Partners (NYSE:EPD). The company owns 20,864 miles of natural gas pipelines, 20,205 miles of NGL and petrochemical pipelines, 5,625 miles of crude oil pipelines, and another 4,215 miles of refined products pipelines. Despite that diversification, the company's focus is on NGLs, as that segment produces 56% of its gross operating margin, which helps fuel a good portion of the company's 4.3% distribution.
Oil and petroleum product pipelines
Leading off the crude oil side, one on the list of best dividend-paying oil pipeline stocks is Enbridge Energy Partners (NYSE:EEP). The company is the U.S.-affiliated MLP of Canada's Enbridge (NYSE:ENB), which operates the world's longest, most sophisticated crude oil and liquids transportation system. Enbridge Energy Partners controls more than 6,000 miles of oil and liquids pipelines, and these assets generate steady income, which Enbridge Energy Partners ships to investors via its solid 6.2% yield. Meanwhile, the much larger and more diversified Enbridge pays a smaller 3.2% dividend.
Another solid oil pipeline focused dividend payer is Sunoco Logistics Partners (NYSE:SXL). It's the third largest MLP transporter of crude oil in the U.S. as it transports 15% of the nation's oil. It also pays a pretty compelling distribution, yielding 3.8%.
A final oil pipeline-focused option is Magellan Midstream Partners (NYSE:MMP), which focuses more on the petroleum products side of the equation. The company owns and operates 9,500 miles of refined petroleum product pipelines as well as another 1,600 miles of crude oil pipelines. These assets help to fuel the company's solid 3.5% distribution.
There are a couple of important takeaways from the companies on this list. First, investors will notice that the dividend yields are all over the board, with yields ranging from the low 3% to more than 7%. That's partially a function of each company's focus as oil pipeline companies, for example, tend to have a lower yield. However, it's also a function of the growth potential of each pipeline company, as many of the companies with smaller current yields are also among the fastest-growing companies.
So, before choosing a pipeline company, an investor must first decide which commodity they want a pipeline company in their portfolio to focus on, as well as the future growth potential of that yield -- a smaller yield today could quickly become an out-sized yield in the future.
Matt DiLallo owns shares of Enterprise Products Partners and has the following options: short January 2016 $32.5 puts on Kinder Morgan and long January 2016 $32.5 calls on Kinder Morgan. The Motley Fool recommends Enbridge Energy Partners, Enterprise Products Partners, Kinder Morgan, and Magellan Midstream Partners. The Motley Fool owns shares of Kinder Morgan.
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