Should You Buy High-Yield Enterprise Products Partners While It's Below $36?

Enterprise Products Partners (NYSE: EPD) is trading a little under $32 per share and offering a distribution yield of nearly 6.8%. That's attractive when you consider that the S&P 500 index (SNPINDEX: ^GSPC) only offers 1.3%, and the average energy stock just 3.6%.

Does that make Enterprise Products Partners a buy? And why is the $36 price point so important?

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What does Enterprise Products Partners do?

Before looking at Enterprise's yield and unit price, it is important to understand the business behind both of those first two numbers. Enterprise is a large North American midstream company. That means it owns things like energy pipelines and storage, processing, and transportation assets. These are large and expensive infrastructure assets. The energy sector couldn't operate without them.

Image source: Getty Images.

Unlike oil and gas producers and chemical and refining companies, volatile commodity prices aren't the key determinant of Enterprise's financial success. That's because it charges fees for moving commodities through its system; the price of what is being transported isn't all that important -- demand is.

And demand tends to be robust even when energy prices are low because oil and natural gas are so important. Thus, Enterprise tends to produce reliable cash flows to back its large distribution.

Over time, Enterprise grows by expanding its portfolio of assets (via ground-up construction or acquisition) and by increasing the fees it charges its customers. The trend has historically been a slow and steady rise in revenue over time. And that has resulted in a slow and steady increase in the distribution over time.

Enterprise's distribution has grown every year for the past 26 years. That's an impressive amount of consistency given the inherent volatility of the energy sector. An investment-grade balance sheet and generally conservative management style have helped a lot over the years.

Should you buy Enterprise below $36?

What is so important about $36? That price is near the historical high point of Enterprise's stock, last seen in the 2014 to 2015 period. So, in essence, the question here is really, "Should investors buy this midstream Master Limited Partnership (MLP) as it closes back in on its all-time highs?"

The question is best answered by looking at the distribution yield. In 2014 and 2015 when Enterprise was trading above $36 per share, the yield was below 4%. That yield level represents the lowest yields in the MLP's history. But that was roughly 10 years ago, and a lot has changed.

EPD data by YCharts.

The most important change, however, is that Enterprise's distribution has grown each and every year. So at the current unit price, which is a bit below $32, the yield is 6.7%. If the price rose to $36, the yield would still be roughly 6%.

Historically speaking, that's still an attractive yield for Enterprise. Compared to the energy sector, that's still an attractive yield. And compared to the S&P 500 index, that also is still an attractive yield.

Enterprise is a bigger business and still a reliable income stock

In the 2014 to 2015 time period, investors were smitten by midstream businesses, bidding them up to lofty valuation levels. That's not the case today. A growing business and a growing distribution have powered Enterprise's price rise. Given the attractive yield, most dividend investors will likely find it a worthwhile addition even as it closes in on its previous all-time highs.

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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.