In a likely case of throwing the baby out with the bathwater, many petroleum product pipeline operators have been sold off en masse with the rest of the energy sector. Far be it from us to argue with the broad sell-off, given what has happened to the price of crude oil since November 2014 (the recent rally notwithstanding), but it does appear that some opportunities have arisen.
Case in point: Spectra Energy (NYSE:SE), a 5.2% dividend-yielding pipeline operator that acts as a simple toll collector -- arguably one of the better businesses to be in -- for the transportation and storage of petroleum products across North America. While one could do much worse than picking up a few shares of Spectra, it isn't the only fish in the sea.
For this reason, some of The Motley Fool's best and brightest did some digging to identify some intriguing options that might be even better than Spectra Energy for Foolish investors to take a closer look at: Enterprise Products Partners (NYSE:EPD), ONEOK Inc. (NYSE:OKE), and Buckeye Partners, L.P. (NYSE:BPL).
Read on to learn more about these energy stocks with higher dividend yields than Spectra Energy.
At 6.2%, Enterprise Products Partners' payout is nearly a full percentage point better than Spectra Energy's 5.3%. Investors shouldn't run out to buy Enterprise Products Partners because its payout is higher, though. They should consider it because the company is a better overall option. Here's why.
We'll start with the financial foundation. Enterprise Products Partners has one of the strongest credit ratings in the midstream sector at Baa1/BBB+, which edges out Spectra Energy's Baa2/BBB-/BBB rating. That stronger credit rating provides Enterprise with better access to the credit markets, meaning it can borrow at very favorable rates even during the current energy market environment.
One of the reasons its credit rating is so strong is that Enterprise retains a larger portion of its distributable cash flow than most of its peers. In fact, it has averaged a 1.4 coverage ratio over the past five years, retaining nearly $5 billion of cash to invest in growth projects. Spectra Energy, on the other hand, expects its coverage ratio to be only 1.2 this year.
Bottom line: While Spectra Energy is a great company, with a very generous dividend, Enterprise Products Partners is just a better option. Not only is its yield higher, but its balance sheet is also stronger and its payout is safer because it retains a lot more cash flow. That's why it's my high-yield energy investment of choice.
It may seem you've missed the boat if you didn't invest in natural gas midstream expert ONEOK Inc. a few months back. But even after the recent run-up in the company's stock from February's lows, investing in ONEOK today would still net you a nearly 6% dividend yield based on the most recent dividend increase earlier this year.
Why ONEOK instead of Spectra? In short, you're investing in somewhat similar businesses -- natural gas and NGL gathering, pipelining, and storing -- but getting 15% more income for your investing dollars with ONEOK right now. Both are well-led enterprises, and both also use MLPs to drive income and asset growth -- though Spectra doesn't leverage its MLPs nearly as much as ONEOK, which is essentially a pure-play operator of its MLP, ONEOK Partners LP.
ONEOK is also a great dividend investment for investors looking for less complexity when it comes to taxes. Since ONEOK is a C-corp, you won't run into potentially owing taxes on your dividends or capital gains inside a retirement account, which you very well could if you invest in an MLP in those kinds of accounts. If you're investing in a taxable account, you also won't have to deal with the more complex K-1 form, and potentially a higher tax bill, versus investing in a C-corp.
In summary, ONEOK is simply a better income investment than Spectra Energy right now, and in the same segment of the energy industry. At the same time, it's also a less complex investment than many of the other alternatives that may pay a higher yield, but at the added cost of more taxes and complexity.
My pick, Buckeye Partners, offers not only a higher current yield than Spectra but a superior growth profile as well.
Buckeye Partners, as with the other picks my colleagues have made, is among the largest pipeline and energy infrastructure operators in the United States. While not quite as large as some of its peers, Buckeye is a major player in the Northeast and northern Midwest. It has also taken advantage of the current energy-sector downturn by buying up assets at great prices, particularly in the petroleum storage space. This distinction is important, because it acts as a natural hedge in our currently oversupplied market and has given Buckeye strong pricing power for its storage facilities, which boast a total capacity of 110 million barrels. For evidence, we need only look to its fourth-quarter 2015 results, where storage revenues increased 25% year over year and operating income surged over 100%.
Buckeye has managed to increase its dividend throughout this downturn, aided by its conservatively financed balance sheet. (Total liabilities were just 51% of total assets as of March 31.) Analysts also expect Buckeye's success to continue, calling for earnings per share of at least $4.50 by fiscal 2020. This amount seems conservative, given the company's continued expansion-via-acquisition policy.
It should also be noted that Buckeye pays no incentives to a general partner. Every penny of profits generated by operations flows directly to unitholders of Buckeye itself, which gives it an instant leg up on many other investment options within the space.
Jason Hall owns shares of Oneok. Matt DiLallo owns shares of Enterprise Products Partners. Sean O'Reilly has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Oneok and Spectra Energy. The Motley Fool recommends Enterprise Products Partners and Oneok 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.