EPD Stock: Collect 6.5% Yield from This High Dividend Stock
1 High-Dividend Stock for Income Investors
Due to the downturn in oil and gas prices, large-cap energy stocks don’t really receive much investor enthusiasm. And when they do make headlines, it’s often about production cuts, layoffs, and even dividend cuts. But does that mean it’s time to ditch energy stocks altogether?
Not really. For instance, Enterprise Products Partners L.P. (NYSE:EPD) is a name worth considering for income investors.
Headquartered in Houston, Texas, Enterprise Products Partners is a master limited partnership that provides midstream energy services. With a market cap of nearly $57.0 billion, Enterprise is one of the largest publicly traded partnerships in the U.S.
The number-one reason for income investors to consider Enterprise Products Partners is its generous payout. With a quarterly distribution rate of $0.42 per unit, the partnership has an annual yield of 6.5%. This makes EPD a true high-dividend stock in today’s market.
Of course, a high yield in the energy sector could simply be a warning sign. For income investors with a long-term horizon, it wouldn’t be a smart idea to put money into a stock that might cut its payout soon.
Fortunately, Enterprise Products Partners’ high yield is not really a sign of trouble. This is because the partnership is actually running a rock-solid business.
You see, despite being a huge player in the oil and gas business, the partnership doesn’t actually do any exploration or production. Instead, it focuses on the transportation of energy products. The partnership’s midstream assets consists of approximately 50,000 miles of natural gas, natural gas liquids (NGLs), crude oil, refined products, and petrochemical pipelines. It also owns and operates storage terminals capable of storing 14-billion cubic feet of natural gas and 260-million barrels of NGL, refined products, and crude oil.
With these midstream assets, the partnership is running a fee-based business that generates stable cash flows. And being able to generate stable cash flows is one of the key reasons why Enterprise deserves income investors’ attention.
In fact, the partnership’s fee-based business has allowed it to pay not just a steady dividend, but an increasing one. Since EPD stock’s initial public offering (IPO) in 1998, the partnership has raised its payout 61 times. Moreover, the most recent 52 dividend hikes were consecutive quarterly increases. (Source: “Distribution Payments,” Enterprise Products Partners LP, last accessed September 5, 2017.)
There are companies with longer dividend track records. But by delivering such consistent payout increases despite the downturn in oil and gas prices, EPD has proven its value to income investors.
Furthermore, the partnership has been growing its financials. In the second quarter of 2017, EPD earned $666.0 million in net income, representing a 16.8% increase year-over-year. The partnership also generated $1.1 billion in distributable cash flow, which provided 1.2-times coverage of its $0.42-per-unit distribution for the quarter. In the first six months of 2017, EPD stock’s distribution coverage ratio was also 1.2 times. (Source: “Enterprise Reports Results for Second Quarter 2017,” Enterprise Products Partners LP, August 3, 2017.)
In other words, this high-dividend stock paying out less than what it earned, leaving a margin of safety.
At the end of the day, keep in mind that it may take a while for oil and gas prices to recover. But with a fee-based business, Enterprise Products Partners should have no problem continuing to generate oversized cash flows and returning some of that to investors.