This 6.6% Yielder Has Been Raising Its Payout for 54 Consecutive Quarters
The Best Income Play in the Energy Sector?
If you want to find high-yield stocks in today’s market, the energy sector would be a good place to start looking. Because of the downturn in commodity prices, quite a few beaten-down energy stocks can offer substantial dividend yields.
The thing is, though, there was a good reason behind the downfall of most high-yielders. When oil and gas prices fell, many energy companies’ businesses deteriorated, and some are still having problems covering their dividends. As long-term income investors, you wouldn’t want to get into a stock before its dividend is cut.
And that’s exactly why Enterprise Products Partners L.P. (NYSE:EPD) is special. Despite the huge crash in oil and gas prices, the partnership has managed to offer an increasing stream of cash distributions to investors.
Just take a look at the chart below and you’ll see what I mean.
Enterprise Products Partners L.P. Distribution History
(Source: “Distribution Payments,” Enterprise Products Partners L.P., last accessed February 22, 2018.)
Consider this: in 2013, Enterprise Products Partners declared and paid total distributions of $1.35 per unit. In 2017, the amount had grown to $1.6675 per unit. That translated to a total increase of 23.5%, which is particularly commendable, given the strong commodity price headwinds during this period.
Moreover, EPD’s distribution history is actually more impressive than what the chart suggests. From the chart, we see that the partnership’s payout has grown every year. But in fact, EPD has been raising its payout every single quarter.
The latest dividend hike, which arrived this January, marked the partnership’s 54th consecutive quarterly distribution increase. (Source: “Enterprise Declares Quarterly Distribution Increase,” Enterprise Products Partners L.P., January 12, 2018.)
With a quarterly distribution rate of $0.425 per unit, EPD stock offers investors a generous annual yield of 6.6%.
Of course, with aggressive payout increases in an adverse commodity price environment, you might be wondering whether the distributions are sustainable. So let’s take a look at the partnership’s financials.
Enterprise Products Partners reported earnings last month. In full-year 2017, the partnership’s operating income grew 10% year-over-year to $3.9 billion. Distributable cash flow, a critical measure of an energy partnership’s performance, came in at a record high $4.5 billion for 2017, which also represented almost a 10% increase from the $4.1 billion in 2016. (Source: “Enterprise Reports Record 2017 Results,” Enterprise Products Partners L.P., January 31, 2018.)
And despite returning an increasing amount of cash to investors every quarter, Enterprise Products Partners’ distributable cash flow provided 1.2 times coverage of its 2017 distributions. This leaves a sizable margin of safety.
The reason that EPD can achieve such an impressive distribution growth history lies in its fee-based business model. The partnership operates one of the largest integrated systems in the midstream energy business.
It has approximately 50,000 miles of natural gas, natural gas liquids (NGL), crude oil, refined products, and petrochemical pipelines, 260 million barrels of NGL, refined products and crude oil storage facility; 14 billion cubic feet of natural gas storage capacity; 26 natural gas processing plants; and 22 NGL and propylene fractionators.
Energy companies pay EPD a fee to use its gathering, processing, transportation, and storage services, reducing the partnership’s direct exposure to commodity prices.
With a growing high yield backed by a solid business, Enterprise Products Partners L.P. could be the best dividend play in the energy sector.