Forever is a long time, but some dividend stocks have proven that they are worth owning for, well, a long time. Two that fit that bill are Enterprise Products Partners (EPD 0.54%) and Enbridge (ENB 0.78%). What's interesting is that both are in the highly volatile energy sector. Here's why these two energy stocks are so reliable on the dividend front.
The middlemen
Energy commodities, like oil and natural gas, are unstable, turbulent, and subject to often dramatic price swings. Companies that operate in the energy sector are largely cyclical in nature because demand for energy ebbs and flows with economic activity. And yet not all of the industry is as risky as it seems. The big standouts are midstream companies.
Image source: Getty Images.
Midstream companies effectively sit between energy producers (upstream) and the chemicals and refining space (downstream). Companies like Enterprise Products Partners and Enbridge own the infrastructure, like pipelines and energy storage assets, that help to move oil and natural gas from where it is produced to where it eventually gets consumed. For the most part, this is a toll-taker business, with fees charged for the use of the infrastructure involved. Even when energy prices move up or down, demand for energy tends to remain fairly resilient.
All in, the cash flows that Enterprise and Enbridge produce are very consistent. That supports both large payments to shareholders and slow-and-steady dividend growth. To put some numbers on this, master limited partnership (MLP) Enterprise has a huge 7.5% distribution yield and a dividend that it has increased annually for 24 years. Enbridge's yield is 7.1%, and the Canadian company has increased its dividend annually for 28 years.
That said, investors need to go in knowing that the yields here will likely represent the vast majority of returns. Midstream stocks like Enterprise and Enbridge offer high yields at least partly because growth prospects for the industry are modest. Essentially, the best infrastructure opportunities have largely been tapped. Higher interest rates are also a burden, with investors shifting to other products (such as high yield CDs). The change in investor sentiment is effectively pushing share prices of high-yield investments lower (and yields higher to better compete with other options). Higher financing costs for future capital investment projects are also a headwind that will likely lead to slower long-term growth. But for investors looking to maximize the income their portfolios generate, there is still a lot to like here.
Similar but different
In the first quarter of 2023, Enterprise's distributable cash flow covered its distribution by a hefty 1.9 times, leaving plenty of room for adversity before a distribution cut would be a risk. In addition, the MLP is investment-grade rated, so it has a strong financial foundation.
Enbridge's dividend was covered by distributable cash flow by around 1.75 times in the first quarter of the year. It, too, is an investment-grade-rated company.
As long as the world needs oil and natural gas, these two North American midstream giants are likely to have robust businesses. But there are some key differences between them. For example, Enterprise is an MLP, which comes with added tax complexity, such as having to file a K-1 form come tax time. Enbridge, meanwhile, pays dividends in Canadian dollars, which means that the amount of cash U.S. investors collect will vary with exchange rates.
On top of those nuances, Enterprise is more focused on natural gas than Enbridge. That said, Enbridge owns a regulated natural gas utility, so it reaches beyond just pipelines. And Enbridge is also a major global player in the clean energy sector with a number of large offshore wind projects in Europe. So, in some ways, it is more diversified than Enterprise. That's not to suggest that Enterprise is ignoring the energy transition that's taking place, but it believes that natural gas will be a key partner to intermittent clean energy sources like solar and wind. And, thus, it is putting its efforts into expanding its ability to send natural gas around the globe.
Perhaps both
Picking between Enterprise and Enbridge is likely to be a difficult choice. They are very similar, with the differences mostly at the edges. If the differences matter greatly to you, then one might get the nod over the other. However, for long-term dividend investors, the best answer might be to own both and stick with them through thick and thin so you can benefit from their hefty and reliable distributions.
Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
