1 Pipeline Stock to Buy in August for Steady Passive Income

Pipeline stocks have long been a favorite among passive income investors. While a bit more complicated in reality, pipeline businesses can be thought of as toll roads for fossil fuels. Companies that drill for oil and gas are considered upstream producers. Downstream producers largely consist of refineries and final distribution channels, such as gas stations.

Pipeline companies are considered midstream producers. That is, they handle fossil fuels after they're produced, but before they're processed and delivered to the final customer.

In general, pipeline infrastructure is difficult to build. These transportation networks can cost billions of dollars, with long construction lead times and numerous regulatory hurdles and permitting requirements. Once built, however, a competing pipeline in the same area usually isn't added until volumes exceed the original pipeline's capacity. In a nutshell, once a pipeline network is established, it often has a monopoly on local fossil fuel transportation.

You can probably already see what makes pipeline stocks so attractive for income investors. Most costs are up front during initial construction. And afterward, ongoing operating costs are relatively low. In combination with a monopoly-like status, pipeline businesses often generate substantial free cash flow, which can be repurposed for dividends or share buybacks.

If you're looking for the best pipeline stock to buy right now, one major pipeline operator sticks out as the obvious choice. Its 5% dividend is as reliable as it gets.

Enbridge remains my top pipeline stock for 2026 and beyond

I've been an admirer of Enbridge (NYSE: ENB) for years. Enbridge owns one of the largest pipeline networks in North America, operating more than 17,000 miles of crude oil and natural gas pipelines across the continent. And according to new research from TD Bank, it's a great time to operate a major pipeline network, especially natural gas infrastructure.

"U.S. natural gas demand from LNG [liquefied natural gas] exports and data centers could support 20 billion cubic feet per day growth through 2030," the bank predicts. That would be a 20% increase from today's levels. "Natural gas demand growth remains firmly underpinned by LNG capacity expansion and data centers, requiring additional infrastructure beyond what is currently under construction."

This should be good news for Enbridge, which moves 30% of North America's crude oil and 20% of U.S. natural gas. More than half of the company's cash flows stem from either gas transmission or gas distribution. And most of those contracts are based on volumes, not pricing. So even if volumes surge, depressing natural gas prices, Enbridge will still benefit from its pipeline network running closer to full capacity.

Image source: Getty Images

Enbridge has ramped up its capital expenditures to support expanding its network for increased volumes. But high infrastructure spending likely won't threaten the dividend. In 2023, the company posted distributable cash per share of around $5.45. Distributable cash flow has increased every year since, and is expected to reach $5.70 to $6.10 per share in 2026.

The dividend payment, for comparison, totals just $2.84 per share. That's within the company's target payout ratio of 60% to 70%, and still leaves the company with an ability to invest between $10 billion to $11 billion per year in new projects.

As TD Bank points out in its research, "Midstream dynamics are localized." That means that the opportunities to scale natural gas transportation infrastructure aren't equally distributed geographically. Enbridge has acknowledged this reality, with its Tennessee Ridgeline, Blackcomb, Aspen Point, and Bay Runner pipelines -- new projects that are expected to enter service later this year -- all located near new major data center development. Enbridge's Tres Palacios and Vector pipeline expansion projects, meanwhile, are also located to take advantage of data center and LNG import opportunities.

Enbridge stock is up roughly 18% in value this year, rising an impressive 80% in value since the end of 2023. Given this performance, the dividend yield isn't as high as it has averaged in previous years. But the company hasn't cut its payout in more than 30 years. And despite rising demand for renewables, its core business remains in great health thanks to geopolitical disruptions and data center construction.

While a 5% dividend payout won't break the bank, this is one of the most reliable income stocks for investors looking for permanent passive income.

Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Enbridge. The Motley Fool has a disclosure policy.