There’s no such thing as a perfect investment as everything you buy comes with puts and takes. For instance, if you are looking for a high yield right now, one of the best options is still Enterprise Products Partners (EPD -0.30%). Despite some negatives regarding the shares of this company, it’s still worth buying this midstream master limited partnership (MLP) like there’s no tomorrow. Here are three reasons why.
1. Enterprise Products Partners has a huge yield
The S&P 500 is averaging a dividend yield of roughly 1.2% today. The average energy stock is yielding about 3.3%. Enterprise Products Partners’ distribution yield is a heady 6.3%. On an absolute basis, Enterprise wins this yield comparison hands down.
EPD data by YCharts.
That’s great, but investors have to go in understanding that Enterprise’s MLP units have rallied dramatically over the past year. While it is up some 25% or so over those 12 months, the yield isn’t nearly as high as it was not too long ago (it has averaged 7.8% over the past five years). But go back three years and the units’ distribution rate has risen by around 40%. This is, in part, because Enterprise’s unit price is finally above where it was before the start of the coronavirus pandemic.
While units were super cheap during the early stages of the pandemic, that’s really not the case anymore. But, despite the multi-year rally, this MLP still offers a very attractive yield to income investors. And if you are trying to maximize the income your portfolio generates, Enterprise remains a highly attractive option.
2. Enterprise should see strong demand for years to come
One of the big negatives around Enterprise and other companies that operate in the carbon energy space is the growth of clean energy. That’s a very real threat, but one that will play out over decades. Demand for oil and particularly natural gas, where Enterprise has a heavy focus, is likely to remain robust for the foreseeable future even as alternative energy sources expand. Carbon fuels are simply too important to the global economy for the world to just stop using them.
In fact, if you look back in history, new energy sources have tended to be additive, never quite going away. For example, coal replaced biomass as the top energy source only to be replaced with oil. And yet biomass and coal are still in wide use today. More recently, natural gas has been displacing coal and oil because it is cleaner burning. Given the growth of the global population and the rise in living standards, more energy is likely to be needed with an “all of the above” approach. It seems likely that this will keep Enterprise’s pipelines and other infrastructure assets full for a very long time to come.
Is there a clean energy risk here? Sure. Is it as big as some investors fear? Probably not.
3. Enterprise Products Partners is financially strong
The last reason to jump aboard Enterprise today is the North American pipeline giant’s strong financial position. There really isn’t too much negative to say here. It has an investment-grade-rated balance sheet. It has increased its distribution annually for 26 consecutive years. And its distributable cash flow covers the distribution by a very generous 1.7x. The distribution looks like it is on extremely solid ground.
Data by YCharts.
That said, there is one caveat. Enterprise tends to be financially conservative. Not taking undue risks will generally mean slow and steady growth over time. While not a bad thing, this means that the 6.3% yield will likely make up the lion’s share of an investor’s return over time. If you are trying to maximize the income your portfolio generates that probably won’t matter to you. But if you are looking for a dividend growth stock, Enterprise might be a bit too tortoise-like for your tastes.
Enterprise has way more positives than negatives
Given the unit price advance over the past few years, Enterprise is not as attractive an income investment as it was. But if you compare it to the broader income options out there, well, it still looks pretty desirable. If you are looking to generate as much income as you can from your portfolio, this MLP should be on your shortlist right now.
