4 Pipeline Stocks Ranked By Which One I'd Buy First

The energy sector is generally considered highly volatile, but there's nuance when you look at the midstream sector. This niche of the industry generally uses a toll-taker business model and generates reliable cash flows that fund large dividends. Dividend investors like me tend to find pipeline stocks attractive. But if I were buying a midstream stock today, I'd start with Enbridge (NYSE: ENB). Here's why, and why I'd follow it with Enterprise Products Partners (NYSE: EPD), Kinder Morgan (NYSE: KMI), and Energy Transfer (TXSE: ET), in that order.

1. Enbridge is a reliable and diversified dividend stock

To get right to the point, Enbridge has increased its dividend annually for 31 consecutive years. That beats out Enterprise, which is at 28 years. Both streaks are impressive, but Enbridge will clearly have a bit of an edge for conservative dividend lovers like me. That, however, isn't the only reason I own it, as the lofty yield, currently around 5.9%, is extremely enticing compared to the scant 1% you'd collect from an S&P 500 index (SNPINDEX: ^GSPC) fund.

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Even that isn't the whole story, though, because Enbridge is actually unique in the midstream sector for its diversification. In addition to owning natural gas and oil infrastructure assets, it also owns regulated natural gas utilities and a small portfolio of clean energy assets. The company's goal is to provide the world with the energy it needs, so it is adjusting its portfolio in response to shifting global energy demands. That makes me feel more comfortable owning it as a long-term investment, putting it in the number one spot here.

2. Enterprise is a focused option

I believe very strongly in diversification for my portfolio and the businesses I own. Some investors prefer to own more focused businesses, which is where Enterprise comes in. It is one of the largest midstream operators in North America, with a portfolio of natural gas and oil infrastructure assets that would be difficult, if not impossible, to replace. The reliable fees it collects, as noted, have allowed it to increase its distribution for 28 years, which is basically as long as it has been publicly traded.

That said, Enterprise is a master limited partnership (MLP). This allows it to pass more income on to unitholders (its yield is 6%), but it requires dealing with a K-1 form come tax time. And MLPs don't play nicely with tax-advantaged retirement accounts. If you can handle a more complex investment, it is a solid, focused choice in the midstream sector, appropriate even for the most conservative income lovers.

3. Kinder Morgan is back on track

If you don't want an MLP, but still want a focused midstream investment, Kinder Morgan could be a good call. It is another North American pipeline giant, but it is structured as a traditional corporation. That means you can happily own it in an IRA. There are a couple of little issues here, however. Notably, the yield is much lower at roughly 4%. That's still dramatically more than the broader market and higher than the 2% on offer from the average energy stock, so it is hard to complain too much.

But you also have to overlook the dividend cut that was made in 2016. To be fair, that cut was made to reduce leverage and refocus the company on growth. At this point, the dividend is growing again, and there's no particular reason to expect another cut. Slow and steady dividend growth is likely what the future will hold.

4. Energy Transfer is the high-yield option

Last up is Energy Transfer and its 7.2% yield. That's the highest on this list, and it might be a good choice for more aggressive dividend investors. I say that because the MLP cut its distribution in 2020. Like Kinder Morgan, the goal was to reduce leverage and, basically, reset the business. That process is complete, and the distribution is growing again. The goal today is slow, steady distribution growth of around 3% to 5% per year.

However, Energy Transfer has another little hiccup in its past. In 2016, it agreed to buy a peer but changed its mind because it would have required taking on significant debt and could have led to a dividend cut. As Energy Transfer worked to scuttle the deal, it issued convertible securities that appeared like they would have protected insiders from a dividend cut, if one were needed. The acquisition was called off, so the convertibles never became an issue, but their mere existence may leave a sour taste in some investors' mouths. You should probably only buy it if you can focus on the future without ruminating on the past.

Trade-offs all along the way

No investment is perfect, so you have to balance risk and reward based on your own situation. For me, the easy pick was diversified and high-yield Enbridge. For others, it could be Enterprise, Kinder Morgan, or Energy Transfer. It all depends on what you are looking to accomplish. All four of these midstream giants offer attractive yields today, but there are subtle nuances you'll need to consider before you push the buy button.

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