EEP Stock: Earn a 9.0% Return from the Energy Sector
January 13, 2017
Dividend Investors Shouldn’t Ignore This Company
As a dividend investor, the most important information after the yield is how the business operation is going to support the dividend. The dividend’s safety relies on every aspect of the business, from the financials to the competitive environment.
Since it is difficult to start such a business, there is not much in terms of competition. Since there are so few companies in the sector, the existing ones own a larger percentage of the market share as a whole when compared to a low-barrier-to-entry market. This is called an oligopoly environment.
So few companies in the market also means that those companies’ profits are inflation-indexed. From a dividend investor point of view, this is all great because it means that the dividend is protected because the bottom line should grow. With growing profits there is also a possibility that dividend hikes could be seen.
The company I’ve found has high profit margins and operates in the energy sector. This sector requires a large up-front capital investment to start a business in. But, after the initial investment, costs outside of maintenance are minimal.
The company I’ve found that meets these criteria is Enbridge Energy Partners L.P. (NYSE:EEP). Enbridge operates in the pipeline sector, which is spread across North America.
The current dividend yield for EEP stock is 9.04%, which is based on the current trading price of $25.78. Even though the dividend yield is high, it has been increased every year for the past seven years, in part because of the sector the business is in.
Enbridge’s competition primarily comes not from other pipeline companies, but the railway sector. However, when comparing the two different methods of transporting oil, there is a clear winner.
Pipelines vs. Railways
When oil companies are looking to partner with a company to move oil, there are two important factors they need to consider: cost and efficiency.
The two most popular choices when moving oil are pipelines and railway carts. In terms of cost, pipelines are the clear winner between the two. The fees associated with pipelines are approximately a third of those associated with moving oil via railway. For oil companies, these fees could be the difference of meeting or missing quarterly earnings. (Source: “About Pipelines,” Association of Oil Pipe Lines, last accessed January 12, 2017.)
Toni Lucatorto/Flickr
Another reason why pipelines are preferred over railways is their safety efficiency record. History shows that railway carts are over 4.5 times more likely to see an oil spill during transportation. Besides the obvious loss of money and time, oil spills can be a public relations nightmare. (Source: “Safety in the Transportation of Oil and Gas: Pipelines or Rail?, ” Fraser Institute, last accessed January 12, 2017.)
But pipelines aren’t perfect, and occasional oil spills will happen. However, the majority of the time, the spill occurs in the facility and not in the actual pipeline. And, even then, the amount of oil spilled is much less than in a railway oil spill.
Time is another efficiency metric that makes pipelines the clear winner. Filling the pipeline with oil is done seamlessly, but is very time-consuming for railway carts because they need to be filled one at a time.
Also Read:
The Best Pipeline Stocks for Retirement Income
Final Thoughts on EEP Stock
No matter how you look at it, EEP stock is a great investment for dividend investors to consider. This is especially true with yields on saving accounts and money market products offering little return.
As a dividend investor, Enbridge Energy Partners is exactly what investors want from a company: high barriers to entry, inflation-indexed revenue, and high margins.
