Enterprise Products Partners Has Had 28 Consecutive Annual Dividend Increases. Does the Energy Stock Have Enough Fuel to Keep the Streak Going?

If you're confused about whether the price of oil and natural gas will continue to stay high, join the club. The vicissitudes of oil and natural gas prices have been notoriously noticeable this year. Energy markets have been whipsawed by severe geopolitical shocks in the Middle East, followed by dramatic regulatory resolutions that have triggered sharp price swings.

This year's chaos perfectly demonstrates why some income investors highly prize Enterprise Products Partners' (NYSE: EPD) toll-road business model. While oil and global gas prices swung by nearly 100% and supply chains experienced massive disruptions, Enterprise's volume-driven, fee-based pipelines continued to collect steady fees. The company provides midstream services to producers and consumers of natural gas, natural gas liquids, crude oil, refined products, and petrochemicals, regardless of wild commodity price fluctuations.

As a master limited partnership (MLP), it functions fundamentally differently from an oil driller or exploration company. Here are three compelling reasons to own Enterprise Products Partners stock.

Image source: Getty Images

Enterprise moves energy; it doesn't sell it

Enterprise doesn't take on direct commodity price risk by betting on whether oil or natural gas prices will rise or fall. Instead, it owns the sprawling infrastructure required to move, process, and store those molecules.

It owns more than 50,000 miles of pipelines, 300 million barrels of liquid storage capacity, and world-class marine export terminals. Roughly 80% of Enterprise's gross operating margin is derived from fee-based contracts. Whether natural gas or natural gas liquids are trading at highs or lows, producers must pay the company a fixed fee per barrel or cubic foot just to move their product through the system. This provides a rock-solid floor for its earnings, insulating the company from broader energy-market crashes.

It has had steady distribution growth

For income-focused investors, Enterprise Products Partners is royalty. The MLP has increased its cash distribution for 28 consecutive years, surviving the dot-com bust, the 2008 financial crisis, the 2014-2016 shale crash, and the 2020 pandemic lockdowns without skipping a beat.

It just raised its quarterly payout by 2.8% to $0.56, equating to a yield of 5.08% at its current share price. That's more than five times the S&P 500 average. Because the company has so consistently increased its dividend, it provides investors with a reliable built-in inflation shield.

Elite financial health and fortress payout coverage

A high yield means nothing if the company has to take on a lot of debt or starve its own business to pay it. Enterprise stands out as one of the most conservatively managed financial fortresses in the market. While its yield outshines its midstream competitors, its payout ratio of around 80% is in the middle of the pack.

In the first quarter, the company reported $2.1 billion in distributable cash flow (DCF), providing a coverage ratio of 1.8 times what it paid out to unitholders. It reported adjusted cash flow from operations of $2.3 billion, up 10%, year over year. The company retains hundreds of millions of dollars in excess DCF each quarter after paying investors, enabling it to self-fund its billions in annual growth projects. It doesn't rely on issuing dilutive equity or taking on high-interest debt to grow. Combined with a stellar leverage ratio and an investment-grade credit rating, the distribution is structurally protected from almost any macroeconomic storm.

One complication comes at tax time

Because Enterprise Products Partners is an MLP, it issues a Schedule K-1 rather than a standard 1099-DIV. This offers excellent tax-deferred income benefits, though it is usually best held in a taxable brokerage account rather than an IRA to avoid potential tax complexities.

Some investors don't like Schedule K-1s because they are complicated and their reports sometimes trickle in during April, instead of March, and can get really complex if you hold them in non-taxable accounts, such as a Roth IRA.

The big edge is that K-1s allow you to compound wealth through tax deferral of your dividends. Yes, you will have to pay tax on your dividends, even if you don't cash them out. However, the actual financial hit is usually very small.

Because Enterprise Products Partners has massive, multibillion-dollar non-cash deductions, such as depreciation of its pipelines and equipment, it uses them to heavily shield its net profits. So if Enterprise pays you $1,000 in dividends over the year, your Schedule K-1 may show you actual share of net ordinary business income was only $100 to $200, and you only owe ordinary income tax on that $100 to $200. Also, that pass-through income qualifies for the 20% qualified business income deduction, further reducing your effective tax burden.

James Halley has no position in any of the stocks mentioned. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.