3 Dividend Stocks Sitting Outside the AI Power Trade -- And Still Winning

Artificial intelligence (AI) is really just a fancy computer program. While much of the news focuses on the computer chips and data centers needed to support AI, that ecosystem doesn't work without electricity. Access to reliable power has been a major bottleneck in the AI build-out, with utilities and other power providers likely to benefit from a step change in electricity demand. But there's another step, seemingly outside of the electricity sector, that you should consider if you are a dividend investor: the midstream sector.

Businesses like Enterprise Products Partners (NYSE: EPD), Enbridge (NYSE: ENB), and Energy Transfer (NYSE: ET) have ultra-high yields and keep winning despite not providing power to AI companies. Here's why, with yields of up to 6.3%, you'll want to get to know these three midstream giants.

Image source: Getty Images.

What do midstream businesses do?

At their core, Enterprise, Enbridge, and Energy Transfer own the energy infrastructure that helps to move oil and natural gas around the world. They largely charge fees for the use of their assets, so the volumes they move are more important than the prices of the commodities being transported. Basically, they are service providers to energy companies in the upstream and downstream of the broader energy sector.

The truth is, Enterprise, Enbridge, and Energy Transfer are kind of boring. However, the fact that energy demand in the United States is expected to increase by 60% between 2025 and 2045 is a very big deal (for reference, demand increased by only 10% between 2005 and 2025). Natural gas, which is most efficiently moved by pipeline, is increasingly being relied on to generate electricity.

So, higher electricity demand will mean higher demand for natural gas. And that will lead to more volume moving through the pipelines owned by this trio of midstream giants. It also means that more pipelines will be needed, offering capital investment opportunities. And overseas demand for natural gas adds even more growth appeal to the story, since AI is a global phenomenon, not just a U.S. event.

Which midstream giant is right for your portfolio?

Enterprise Products Partners is a bellwether name in the midstream sector. The master limited partnership (MLP) has increased its distribution annually for 28 years and offers an attractive 5.7% yield. With slow and steady distribution growth in the low single digits, this financially strong business will likely be a good pick for conservative investors.

Enbridge is based in Canada and has a yield of 5.8%. Its dividend streak is up to 31 years, in Canadian dollars. The dividends U.S. investors receive will fluctuate along with exchange rates. It also has a more diversified portfolio than most of its pipeline peers, with regulated natural gas utilities and a small clean energy business in the mix. However, the really big difference here is that Enbridge is not an MLP. That means investors don't have to deal with a K-1, and it can be easily held in a tax-advantaged retirement account, such as an IRA. MLPs don't play nicely with tax-advantaged accounts. Like Enterprise, it is a conservatively managed business, so most investors will be comfortable owning it.

Energy Transfer is another MLP, but it has the highest yield on this list at 6.3%. For those looking to maximize the income their portfolios generate, it will be an attractive option. The caveat is that Energy Transfer cut its distribution in half during the COVID pandemic. The purpose was to strengthen the balance sheet, and that task has been completed. The distribution is growing again, with a low single-digit growth target. Moreover, the distribution is above its level prior to the cut and well covered by distributable cash flow. For more aggressive investors willing to overlook past transgressions, it could be worth a deep dive.

Who powers the power companies?

At the end of the day, high-yield midstream businesses like Enterprise, Enbridge, and Energy Transfer are still picks-and-shovels plays in the development of AI. Only, they don't directly support AI in any way; they support the power companies that support AI, effectively operating one step back from the action. If you are a dividend lover, these three energy players are worth a closer look right now, as electricity demand starts to take off.

Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.