Where Will Enterprise Products Partners Be in 3 Years?

Enterprise Products Partners (NYSE: EPD) is a leading player in the North American midstream sector. Using a toll-taker business model, the master limited partnership (MLP) tends to be a rather boring business.

But that's a feature, not a bug, when you note that it has a well-above-market 6.8% distribution yield. In three years, Enterprise Products Partners is likely to be every bit as attractive as it is today if income is your goal. Here's why.

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What does Enterprise Products Partners do?

Enterprise Products Partners owns energy infrastructure, including things like pipelines, storage, processing, and energy transportation assets. These are large and costly assets that are absolutely necessary for the proper functioning of the energy sector. Without Enterprise Products Partners and its peers, energy wouldn't get from where it is drilled to where it is used.

Image source: Getty Images.

What's interesting about the midstream industry, however, is that most of the businesses here, Enterprise included, simply charge fees for the use of their assets. The price of the commodities flowing through their system is less important than demand. So long as volume is strong, Enterprise will have solid performance. But growth is modest because there are only two real ways to expand revenues.

The core method for growing revenues is to raise prices. But inflation-level increases, or perhaps a bit more, are the best that investors can expect on this front.

Building and/or buying additional assets is the second main avenue for growth. The problem is that capital investment opportunities aren't as robust as they used to be, so building and buying energy infrastructure can only do so much as well.

Enterprise has a runway for continued growth

That said, Enterprise is a very large midstream business, so it has many assets that it can invest in, even if any single investment is modest. The MLP currently has around $7.6 billion worth of capital investment projects in the works. These projects are expected to be completed at various points through to the end of 2026. There are another $700 million worth of projects on the drawing board behind the projects being worked on now as well, which will extend the investment runway even further.

This is all very good news for income investors. While none of these projects is going to lead to a step change in Enterprise Products Partners' distribution, they will all help support regular, modest annual increases. So if recent trends hold, the distribution could grow around 5% a year for the next three years. That's nearly twice the rate of historical inflation growth and means that the buying power of the MLP's distribution is likely to keep growing over time.

The icing on the cake with Enterprise Products Partners is its size. It has the scale to act as an industry consolidator, buying attractive assets that go up for sale or simply buying up entire competitors. That, in turn, could lead to faster distribution growth. While you can't count on acquisition-led growth, the 5% or so distribution growth floor with the opportunity for more is a very attractive story over the next few years, given the lofty yield on offer today.

Who should buy Enterprise Products Partners?

Enterprise Products Partners is not going to interest all investors. It is likely to be most attractive to dividend investors who are trying to maximize current income.

However, the nice piece is that you don't have to give up dividend growth to get the 6.8% yield. Sure, distribution growth will be slow and steady over the next three years, but that slow and steady growth means you won't lose ground to inflation. Thus, the yield here will likely be every bit as attractive in three years as it is right now.

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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.