The average energy stock yields 3.2%. The S&P 500 yields 1.2%. Midstream energy giant Enterprise Products Partners (NYSE: EPD) yields 7%, twice as much as the average energy stock and over five times more than the broader market. And Enterprise’s unit price is only about $30, so you can get in the door with even less than $500 if you want.
Enterprise Products Partners has come back from the abyss
Midstream players like Enterprise own large energy infrastructure like pipelines, storage, and transportation assets. These are hard to replace or displace and vital to the energy sector’s operations. They are also very expensive to build. So leverage is a notable issue in the midstream sector.
That weighed on the entire sector when interest rates were on the rise. Higher rates basically meant higher operating costs. That was a key reason why Enterprise’s unit price was weak following the market drop during the early days of the COVID pandemic. That drop, ironically, was caused by a concern that energy demand would decline along with economic activity. However, the vast majority of Enterprise’s cash flows are driven by fees, not energy prices.
Basically, Enterprise gets paid for the use of its assets. The price of the commodities flowing through its system is far less important than demand for energy. Energy demand tends to remain robust even when oil prices are weak because oil, natural gas, and the products they get turned into are so important to the global economy. Now that rates are likely to head lower, investors have finally caught on to the backstory here. Shares of Enterprise are nearly back to where they were prior to the pandemic.
Enterprise still has a big yield
That said, this master limited partnership (MLP) still has a huge yield. Don’t worry, though — it isn’t a sign of weakness. It’s just a combination of the sector (midstream entities tend to pay high yields) and the MLP structure, which is specifically designed to pass income on to unitholders. Despite the unit price recovery, Enterprise is still an attractive option if you are looking for a high-yield investment.
However, it’s about more than yield. Remember, Enterprise’s core operation tends to provide relatively consistent cash flows through the entire energy cycle. But there’s more. For example, Enterprise’s balance sheet is investment grade rated. That’s great, but there’s another important wrinkle here that sets it apart from its closest peers. Enterprise has long operated with a highly conservative amount of leverage, showing up near the bottom of the debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) list year after year.
Management’s fiscally conservative approach doesn’t stop there. Enterprise’s distributable cash flow also covers its distribution 1.7 times over. That provides a huge amount of leeway for adversity before a distribution cut would be on the table. And then there’s management’s commitment to growing the distribution, which has been increased annually for 26 consecutive years. That’s a very impressive streak when you consider the inherent volatility of the energy sector.
Enterprise Products Partners is an income investor’s best friend
There are reasons why you might want to select a different energy stock or even midstream investment (more attractive growth opportunities, for example). But if what you care about is a high yield from a business that looks likely to pay you well through both the good times and the bad times, then Enterprise should be on your investment shortlist. While the yield is likely to make up the lion’s share of your return over time, it would be hard to find a better all-around pick if you are trying to maximize the income your portfolio generates.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
The Ultimate High-Yield Stock to Buy With $500 Right Now was originally published by The Motley Fool
