There are several qualities to like about Enterprise Products Partners(NYSE: EPD), starting with its sizable 6.8% yield. To put that into perspective, stocks in the S&P 500(SNPINDEX: ^GSPC) currently generate an average yield of just 1.1%. Does that lofty yield turn Enterprise into a millionaire-making investment? It’s a bit complex.
Enterprise operates in the midstream segment of the broader energy sector. It is the most reliable segment of the industry, helping to transport oil, natural gas, and the products derived from them around the world. The price of the commodities flowing through Enterprise’s system is less important than the volume it is moving because it charges fees for the use of its energy infrastructure assets.
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While commodity prices may fluctuate wildly, demand for energy tends to remain fairly consistent due to its importance in the global economy. As such, Enterprise generates very reliable cash flows to support its very large distribution. In fact, over the trailing 12 months, the master limited partnership’s (MLP) distributable cash flow covered the distribution by 1.7 times. That leaves a lot of room for adversity before the distribution would be at risk.
As an additional safeguard, Enterprise has an investment-grade-rated balance sheet. So, if there were a short-term challenge to overcome, it could lean on its balance sheet to muddle through without resorting to a distribution cut. The combination of strong distribution coverage and a robust financial position has enabled Enterprise to expand its distribution for 27 years. That time span includes two notable downturns in the energy sector, the Great Recession, and the COVID-19 pandemic.
If you are a dividend investor looking for a reliable high-yield investment, Enterprise Products Partners will be right up your alley. But will it turn you into a millionaire? That’s a tougher bar to clear than you may think.
Since Enterprise’s initial public offering (IPO) in 1998, its total return is a whopping 3,470%. That compares to a roughly 890% total return for the S&P 500 index. More yield and more return, sign me up!
Not so fast, though…
Total return includes the reinvestment of Enterprise’s distributions. If you spent the distributions, the numbers look a little different. Enterprise’s unit price has increased by only 490% since its IPO. That’s not bad, given that the S&P 500’s price-only gain over that same span was 510%. However, it highlights an important piece of the story: Enterprise’s distribution is an important part of an investor’s return.
In fact, the reinvestment of the distribution clearly makes up the vast majority of the total return picture. All in all, if you buy Enterprise with the intention of using the income you generate to cover living expenses, it will likely provide you with a lifetime of substantial and reliable distributions. That’s hard to complain about.
However, in this situation, it is likely to offer “only” slow and steady capital appreciation. The impressive total return story only happens when you reinvest the distribution. However, most investors focused on total return are likely to avoid an income stock like Enterprise in favor of growth stocks.
When you step back and look at the whole investment picture, Enterprise could, indeed, help you build a seven-figure portfolio. However, a lot depends on how you utilize the reliable and large distributions it generates. If you spend them, reaching millionaire status will probably take you a lot longer. If you reinvest those distributions, however, this income-focused stock could produce bigger returns than most growth investors would suspect.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
