3 Midstream Stocks to Buy With $5,000 and Hold Forever

Date:

If you’re an investor looking for high-yield investments with some solid upside potential, there is perhaps no better place to look than the energy midstream space. The stocks in the space tend to have attractive yields, while the sector as a whole trades below historical multiples.

The sector has gone through a transformation in the past decade, with midstream companies reducing leverage and being more disciplined when it comes to funding growth projects. By and large, the companies structured as master limited partnerships (MLPs) have also eliminated their IDRs (incentive distribution rights), which essentially acted as a tax paid to their general partners every time they increased their distributions.

Start Your Mornings Smarter! Wake up with Breakfast news in your inbox every market day.

Image source: Getty Images.

Despite the companies being in better financial shape today than under the old MLP model, the stocks trade at a discount to the 13.7 multiple that midstream MLPs traded at between 2011 and 2016.

Against that backdrop, let’s look a three great MLPs — Enterprise Products Partners (NYSE: EPD), Energy Transfer (NYSE: ET), and Western Midstream (NYSE: WES) — investors might want to consider buying and holding forever. All three stocks trade well below the MLP average multiple from that 2011-to-2016 period.

If you’re looking for consistency, there is perhaps no better option in the midstream space than Enterprise Products Partners, which has increased its distribution for 26 straight years during all types of economic and energy environments, and has been a consistent performer throughout the years. The midstream MLP currently has a forward yield of about 6.5%.

The company’s great track record can be attributed to its largely fee-based model as well as its conservative nature with leverage and capital expenditure (capex) spending. It has a well-covered distribution based on its distributable cash flow (DCF), which is operating cash flow minus maintenance capex. Based on that measure, it had a distribution coverage ratio of 1.7 times in the last quarter.

Meanwhile, Enterprise is starting to ramp up its growth projects after pulling back during the pandemic. Enterprise has also said it is one of the best-positioned companies to benefit from increased natural gas and power demand stemming from the artificial intelligence (AI)-driven data center buildout given its pipeline and storage assets.

Despite having arguably one of the most attractive integrated midstream footprints in the U.S., Energy Transfer’s stock is among the cheapest in the space. That’s partly because the company ran into trouble during the pandemic and decided to slash its distribution in half to decrease leverage and improve its balance sheet (which it has achieved).

Share post:

Popular

More like this
Related

Where 49ers would pick in 2025 NFL Draft after loss to Dolphins

Where 49ers would pick in 2025 NFL Draft after...

Giants take sole possession of No. 1 overall pick in 2025 NFL Draft with Raiders’ win over Jaguars

With the Raiders' 19-14 win over the Jacksonville Jaguars...

Commitment to golf at Harvard a no-brainer for Mayo standout Isaac Ahn

Dec. 22—Dartmouth was knocking on Isaac Ahn's door.Columbia, too.In...

Maiocco’s Observations: Deebo resembles old self in 49ers’ loss

Maiocco's Observations: Deebo resembles old self in 49ers' loss...