2 Midstream Dividend Stocks Nobody's Talking About Right Now

The midstream segment of the broader energy sector allows investors to avoid the complication of volatile energy prices. Fees are the driving force in the midstream, which provides services to producers and refiners. For income investors, the midstream is a great place to look for investments.

One of the most popular midstream businesses is Enterprise Products Partners (NYSE: EPD), thanks to its conservative business approach and reliable, growing distribution. But it isn't the only option, with lesser-discussed choices like MPLX LP (NYSE: MPLX) and ONEOK (NYSE: OKE) also worth a closer look. Here's why.

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What's so special about Enterprise Products Partners?

Enterprise Products Partners is one of the largest midstream operators in North America. The appeal of the master limited partnership (MLP) is generally tied to two factors: yield and distribution history. Enterprise's 5.7% yield is more than five times that of the S&P 500 index (SNPINDEX: ^GSPC) and well above the 2.2% yield of the average energy stock. Meanwhile, the distribution has been increased annually for 28 years, which is basically as long as Enterprise has been publicly traded.

Conservatively managed Enterprise is a bit of a tortoise, but it offers a good mix of income and distribution growth. It is a solid choice for most investors, but it isn't the only choice.

MPLX LP has a higher yield

With a 7.3% yield, MPLX LP can materially increase the income stream an investor's portfolio generates. That's hard to ignore if you are trying to live off your dividends. Like Enterprise, MPLX LP helps to move oil and natural gas around the world, largely charging fees for the use of its assets. However, there are two big differences that investors need to understand: distribution growth and distribution coverage.

Enterprise has a long history of slow and steady distribution growth. Low single digits are pretty much the norm. MPLX LP's distribution has been growing at 10% or more a year for several years. A higher yield and faster distribution growth are attractive, but they come at a cost. Enterprise's distributable cash flow covers its distribution by roughly 1.7x, while MPLX LP's target is 1.3x. That leaves less room for adversity. If your primary focus is on dividend growth, however, MPLX LP's more aggressive positioning may be just right for you.

ONEOK has a lower yield, but it isn't an MLP

The biggest difference between ONEOK and Enterprise Product Partners isn't actually ONEOK's lower 4.4% yield. It is the fact that ONEOK isn't an MLP, instead being structured as a regular corporation. MLPs don't play nicely with retirement accounts like IRAs, so ONEOK could allow investors to buy a high-yield midstream company without running afoul of tax laws. And for those who just like to keep life simple, owning ONEOK will let you avoid dealing with a K-1 at tax time. For some investors, the trade-off between income and complexity will be worth it.

ONEOK, like Enterprise, has a solid dividend history and targets low-single-digit dividend growth. However, ONEOK hasn't increased its dividend every single year, notably holding it steady during the coronavirus pandemic. That said, like Enterprise, ONEOK has capital investment projects scheduled all the way out to 2029, so there's no particular reason to believe that this pipeline operator's ability to continue growing the dividend is at risk.

Industry bellwether Enterprise is great, but not the only option

Enterprise is a solid option for most investors, particularly those with a more conservative investment profile. But you can step up on the distribution growth front and yield if you take on a bit more risk with MPLX LP. Or, if you don't want to own an MLP but still want midstream exposure, you can step down a little on yield and buy ONEOK, which has a similar dividend growth profile. Whatever choice you make, perhaps the big benefit is that you are adding energy exposure without taking on all of the commodity risk of an energy producer.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Enterprise Products Partners and Oneok. The Motley Fool has a disclosure policy.