The S&P500 index (SNPINDEX: ^GSPC) yields a paltry 1.2%. For comparison: the 6.3% return on offer Enbridge(NYSE: ENB) and the 6.4% from Partners for business products(NYSE:EPD) are huge! But there’s actually more to like about these two North American midstream giants than just high yields.
This is why you can easily buy and hold these ultra-high yield stocks for a decade or more.
Both Enterprise and Enbridge operate in what is known as the midstream segment of the broader energy sector. In fact, they invest in large and expensive assets such as pipelines, storage terminals, transportation hubs and processing plants. These vital energy sources are then offered to upstream (energy production) and downstream players (chemicals and refining) for their use.
Image source: Getty Images.
What’s important, and what differentiates midstream from upstream and downstream, is that Enbridge and Enterprise customers generally pay fees for use of the assets. Commodity prices play a very small role in the revenues these midstream giants generate. Demand for their services is more important, and even during an energy downturn, demand for oil and natural gas typically remains high. These two fuels are crucial for economic activity, regardless of the price charged on the open market.
One counterargument here is that renewable energy will replace carbon fuels in the long term. This could very well be true, but it is not a light switch. The transition will likely take at least ten years. It’s also worth noting that even the dirtier coal and biomass are still important energy sources around the world, despite the existence of better options (particularly oil and natural gas).
It is not yet clear that clean energy will replace anything, especially if energy demand continues to increase. An “all of the above” strategy could ultimately be the winning ticket. That would mean demand for Enterprise and Enbridge’s vital energy services could remain robust for decades to come.
So there is no particular reason to worry about the basic businesses in which these two midstream players operate. But why these two? For starters, they have proven to be very reliable income stocks. Enterprise has increased its distribution for 26 years in a row. Enbridge has increased its dividend (in Canadian dollars) for 30 years. It is quite clear that both countries place great importance on rewarding investors with a reliable and growing income stream.
Then there is the financial basis. Enterprise Products Partners has an investment grade rated balance sheet, and so does Enbridge. The company’s distributable cash flow covers its distribution by as much as 1.7 times. Enbridge expects its distributable cash flow payout ratio to remain right in the middle of its targeted range of 60% to 70%. In short, there’s no particular reason to think any of these midstream giants are at risk of being cut.
Frankly, returns from both investments will likely account for the lion’s share of returns over time. There are limited opportunities for large, growth-oriented midstream investments in North America. However, acquisitions and ongoing capital investment programs should ensure that both companies continue to grow over time. Enbridge has a more than $20 billion capital investment program underway through 2029, and Enterprise currently has nearly $7 billion in growth projects under construction.
If you’re looking at these two very attractive income stocks and trying to decide whether to buy one, there are some important distinctions you can make between them. Enterprise is a master limited partnership (MLP), which brings a few more complications when filing your taxes. Enbridge, meanwhile, has exposure to natural gas companies and clean energy assets, giving it a more diversified asset portfolio. Neither of these issues is likely to make or break the attractiveness of these two ultra-high yield investments, but individual investors may ultimately prefer one over the other. Regardless of which one you choose, however, you should be able to happily collect lofty dividend checks for years to come.
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Reuben Gregg Brewer has positions in Enbridge. The Motley Fool holds and recommends positions in Enbridge. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
2 Ultra-High Yield Dividend Stocks to Buy and Hold for Ten Years Originally published by The Motley Fool
