What does it take to generate passive income? There are two essential ingredients. First, you need money up front to invest. Second, you need an investment that you pay off regularly.
The good news is that many investment alternatives pay you for owning them. There is one in particular that I think is among the best options. This high-yield dividend stock is a monster passive income machine.
A pipeline powerhouse
Partners for business products (NYSE:EPD) is a leading midstream energy company. It was founded in 1998 and is based in Houston.
The limited partnership (LP) operates more than 50,000 miles of pipelines transporting natural gas liquids (NGLs), natural gas and crude oil through much of the U.S. company’s midstream platform. trains, 26 fractionators, 20 deepwater docks, two propane dehydrogenation facilities and two isobutane dehydrogenation facilities.
Enterprise is not resting on its laurels. The company has approximately $6.5 billion worth of major projects under construction. Most are NGL-related, including new plants in the Delaware and Midland Basins and the Bahia Pipeline.
Investors can rest assured that Enterprise Products Partners is using its money wisely. The LP has delivered an average return on invested capital (ROIC) of 12% over the past decade. The ROIC has also been in the double digits every year since 2005 – a period that included the Great Recession, the oil price collapse from 2014 to 2017 and the COVID-19 pandemic.
A passive income machine that is attractively priced
What about passive income? Enterprise Products Partners offers plenty of it. The company’s distribution yield is currently over 7%. For every €10,000 you invest, you will receive an annual income of more than €700.
That income will likely grow over time. Enterprise Products Partners has expanded its distribution for 25 years in a row at a compound annual growth rate of approximately 7%.
I am confident that the LP will continue that impressive streak. The adjusted cash flow from operating activities (CFFO) of companies continues to grow. It is the only midstream company that has consistently increased adjusted CFFO per unit and decreased unit count without any sales of tangible assets.
Debt repayments should also not disrupt Enterprise Products Partners’ distribution payouts. The company manages its debt well. And it is the only midstream debt issuer with an A rating.
As a bonus, Enterprise is attractively priced. The units trade at 10.9 times forward earnings. That is well below S&P500 the energy sector’s expected earnings multiple of almost 13.3.
A drawback
Some may think that Enterprise Products Partners’ focus on fossil fuels could limit its growth. However, I don’t see that as a disadvantage. Demand for natural gas and NGLs in particular should continue to grow. Enterprise’s midstream resources will be needed for a long time.
However, there is one downside to investing in Enterprise. LPs must provide each unit holder with a Form K-1. This can make tax preparation more difficult.
Should you invest $1,000 in Enterprise Products Partners now?
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Keith Speights holds positions at Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
This high-yield dividend stock is a monstrous passive income machine and was originally published by The Motley Fool
