Collect Rising Dividends from a Beaten-Down Industry
Every income investor wants to own dividend growth stocks. As a result, companies with an impressive track record of raising their dividends have been highly sought after. And when investors bid up their share prices, their yields become lower.
In fact, if you buy ProShares S&P 500 Dividend Aristocrats ETF (BATS:NOBL), an exchange-traded fund (ETF) that tracks S&P 500 companies with at least 25 consecutive years of annual dividend increases, you would be earning a yield of just 1.77%.
And that’s why Enterprise Products Partners L.P. (NYSE:EPD) deserves your special attention. The partnership has an amazing track record of increasing its distributions, yet it still offers a generous annual yield of 6.9%. Let me explain.
Commanding over $50.0 billion of market cap, Enterprise Products Partners is one of the largest master limited partnerships (MLPs) in the United States. It provides midstream energy services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, refined products, and petrochemicals.
Right now, the partnership’s portfolio consists of approximately 50,000 miles of pipelines; 260 million barrels of crude oil, NGL, and refined products storage capacity; 14 billion cubic feet of natural gas storage capacity; 26 natural gas processing plants; and 22 NGL and propylene fractionators.
Due to plunging oil and gas prices in recent years, many energy companies have been struggling. Production cuts were often accompanied by massive layoffs. Some companies have even cut back their dividends. Enterprise Products Partners, one the other hand, not only managed to survive the downturn, but was actually increasing its payout to investors.
Consider this: since Enterprise Products Partners completed its initial public offering (IPO) in 1998, the partnership has delivered 63 distribution hikes, with the last 54 of them being consecutive quarterly increases. Most companies would be proud to be able to raise their dividends once a year, but EPD managed to do that every quarter, even with strong commodity price headwinds. (Source: “Enterprise Declares Quarterly Distribution Increase,” Enterprise Products Partners L.P., January 12, 2018.)
The reason behind that impressive dividend increase track record lies in the partnership’s fee-based operations. Customers pay EPD a fee to use its gathering, processing, transportation, and storage assets. Because Enterprise Products Partners does not drill new wells, it does not have much direct exposure to commodity prices. And due to the partnership’s growing business, management will likely announce another dividend increase soon.
In 2017, Enterprise Products Partners generated an operating income of $3.9 billion, representing a 10% increase from 2016. Total gross operating margin grew eight percent for the year to an all-time record of $5.7 billion. Distributable cash flow, a critical measure of an MLP’s performance, increased 10% to $4.5 billion, also marking a new record. (Source: “Enterprise Reports Record 2017 Results,” Enterprise Products Partners L.P., January 31, 2018.)
Note that in 2017, Enterprise Products Partners’ distributable cash flow provided 1.2 times coverage of its $1.6675 per share cash distributions declared for the year. So there’s plenty of room for safety.
The partnership usually declares its second-quarter distribution in early April. Given its solid financials and well-covered payouts, investors of EPD stock can expect another distribution hike next month.