What makes an outstanding dividend stock? It’s probably a dividend that gives investors a solid starting yield. You’ll want to trust the company to pay it and, ideally, grow the dividend payment over time. It can be hard to check all these boxes.
Enterprise Products Partners (EPD) could be up to the task. The oil and gas master limited partnership (MLP) boasts a 7.2% starting yield and has increased its distribution (dividend in MLP terms) for 25 consecutive years.
Will that continue? Enterprise Products Partners could be the right dividend stock for you. Here’s why.
What is a master limited partnership?
Master limited partnerships (MLPs) are a neat business model. They are publicly traded partnerships, which give investors some tax advantages compared to a traditional corporation while still maintaining the ability to buy and sell on the stock market easily. An MLP is a pass-through entity, meaning the partnership doesn’t pay corporate taxes; unit holders (you) report the partnership’s profits or losses instead. When you file your taxes, you do so with a form called a Schedule K-1.
The tax benefit of investing in MLPs is that you avoid double taxation. A dividend is technically taxed twice: Once because the corporation pays the dividend out of its taxed profits, and again when shareholders file their taxes.
To qualify for their tax exemption, MLPs must also derive at least 90% of their income from the exploration, production, and transportation of natural resources or real estate. That means most MLPs are energy companies like Enterprise Products Partners.
Enterprise Products Partners is a blue chip MLP
As far as MLPs go, Enterprise Products Partners is a good one. The company operates a network of pipelines that span the United States, transporting oil, gas, and refined products throughout the country. A midstream like Enterprise Products Partners is similar to a toll booth in the energy industry, collecting fees on the materials passing through its pipelines.
Today, business is excellent for midstream companies like Enterprise Products Partners. The United States is producing fossil fuels at historically high levels, and those fuels must be transported to various places, such as refineries and exports.
Financially, Enterprise Products Partners is rock-solid. The company has paid and raised its distribution for 25 consecutive years, enduring recessions and the energy industry’s up-and-down cycles. It maintains an investment-grade credit rating from Moody’s and S&P Global, and the distribution is just 56% of its cash flows.
If you want passive income, Enterprise Products Partners can deliver it. High yields are sometimes a warning sign because the market might be skeptical that the company can afford the payout. Not so here. You can hold this MLP and sleep well at night.
Should investors buy today?
Valuing a midstream company involves comparing the amount investors pay for the company’s assets after subtracting debt, known as book value, to the business’s profitability. I’ve charted both below to do this.
Enterprise Products Partners has averaged a 4.1 price-to-book value ratio (P/B ratio) over the past decade. Today, it trades below that at 3.4 times book value. Yet the company is generating over 16% returns on its invested capital, the highest in a decade. Based on this, one could argue that Enterprise Products Partners is very attractive at its current price — a strong buy today. You’re paying less for better business performance.
EPD Price to Tangible Book Value data by YCharts
Investors have a shot at nearly 20% returns in price appreciation if the stock were to track back to its long-term average P/B ratio. Then, factor in the 7.2% starting distribution yield. Enterprise Products Partners is a fantastic dividend (distribution) stock today — and a potential market-beating investment if shares get hot.
Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Moody’s and S&P Global. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
