Prediction: Buying Enterprise Products Partners Today Could Set You Up for Life

Buying stock in midstream energy giant Enterprise Products Partners (NYSE: EPD) could set you up for life. Now, that doesn't mean the stock is going to skyrocket and make you a millionaire overnight on a modest investment. Instead, what buying Enterprise's stock will give you is a lifetime of solid and growing passive income.

Enterprise currently sports an attractive forward yield of 6.9%. But the beauty of Enterprise is that the pipeline management company has also increased its distribution in each of the past 26 years, both in good and bad energy markets. Last quarter, the company increased its quarterly payout by 3.9% year over year to $0.535 per unit.

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If Enterprise were to increase its distribution by a similar amount moving forward, its distribution would approximately double over the next 20 years. With a payout of nearly $4.50 per share by that time, your "personal yield" on an investment in Enterprise at that time would be a little over 13.6% based on the stock's current levels today. While "personal yield" is not a standard financial term, it is simply the yield you are getting based on your personal cost basis (the stock's current dividend/your cost basis).

Image source: Getty Images.

Now, if Enterprise were to keep raising its distribution at this same pace for the next 30 years, its payout would get to $6.75 per share each year. That would be about a 20% personal yield if you bought the stock today. So if you're between 30 and 40 years old, that would set you up with a nice, very high-yield income stream just as you were entering retirement.

Enterprise operates as an MLP, which benefits DRIP investors

Another attractive thing with Enterprise is that it's structured as a master limited partnership (MLP), which means it pays distributions instead of traditional dividends. The key difference is tax treatment. A large portion of these distributions is typically classified as return of capital, which isn't taxed immediately. Instead, it lowers your cost basis in the stock.

Once your cost basis hits zero, any additional distributions are taxed as capital gains, and when you sell, you'll pay taxes on the deferred portion of distributions at the ordinary income tax rate, which should be lower when you're retired. The rest of the gains are taxed as capital gains.

Because of its preferential tax treatment, many investors also don't take the distribution when they are younger. Instead, they use what is called a DRIP, or dividend reinvestment plan. These are plans offered by companies where they will automatically reinvest your distributions back into the stock at no commission in lieu of a cash payment. Using a DRIP to reinvest your distributions over a couple of decades can turn your initial investment into a significant income stream when it's time to retire and start collecting the payouts.

What makes Enterprise an attractive stock to buy now?

What helps separate Enterprise from other high-yield stocks is its consistency. The company has always taken a conservative approach, which has allowed it to weather any economic or energy market storms. Enterprise owns one of the largest integrated midstream companies in the U.S., and it is particularly strong in the natural gas liquids (NGLs) space.

NGLs, which include ethane, propane, butane, isobutane, and natural gasoline, are high-value by-products of natural gas and crude oil production. Ethane is one of the main feedstocks in the petrochemical industry to produce plastics and chemicals, while butane can also be used as a petrochemical feedstock, as well as for heating and cooking. The other three tend to be blended into fuels. There is also a large U.S. export market for both propane and butane, and Enterprise is heavily involved throughout the entire NGL value chain.

Meanwhile, the company takes several measures to ensure the predictability of its cash flows. Approximately 85% of its business historically comes from fee-based services that aren't impacted by energy prices or commodity spreads. At the same time, it likes to include take-or-pay provisions in its initial contracts, which assures it gets paid no matter whether customers use its services. It also attaches yearly inflation escalators to its contracts, as well.

Additionally, Enterprise has always maintained a conservative balance sheet and robust distribution coverage ratio. Building pipelines and other midstream assets is a capital-intensive business, so midstream companies carry debt. Given the strong cash flows and predictable nature of midstream assets, many companies target leverage -- net debt/adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) -- in the 4x to 4.5x times range.

However, Enterprise has always taken a more cautious approach, ending Q1 with leverage of only 3.1 times and an investment-grade credit rating on its debt. Today, the company largely self-funds its growth projects through its cash flows, although it will take on some additional debts to pursue attractive growth projects.

At the same time, the company's distribution is well covered by its distributable cash flow, which is its operating cash flow minus maintenance capital expenditures. Last quarter, its coverage ratio was 1.7 times, which gives it ample room to continue to increase its distribution in the years ahead.

Overall, Enterprise is a sleep-well-at-night stock that can help set up investors for life, offering solid price appreciation potential to go along with an attractive and rising distribution.

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Geoffrey Seiler has positions in Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.