Current macroeconomic factors make a strong case for surging prices and demand for commodities, particularly oil and gas, asserts Rida Morwa, editor of High Dividend Opportunities.
You should protect your portfolio from the dangers of inflation and the weakening dollar with midstream assets— the lifeline of the growing economy. If oil is the blood of the economy, then pipelines are the lifelines.
Despite fears of regulation to support the climate change agenda, Warren Buffett continued making significant investments in energy pipeline companies because he realized a crucial thing: If it's getting harder to build these (pipelines), that means existing infrastructure became that much more valuable.
Inspired by Mr. Buffett's investment style, we also love businesses where we can sit back and collect fees, and we love some of the great opportunities in the midstream sector. We're buying from the midstream sector hand over fist to add to our long-term reliable income portfolio.
Here are two high-yielding midstream stocks that let you benefit from this commodities bull run while collecting growing returns for years to come.
Enterprise Products Partners (EPD) owns over 50,000 miles of NGL, crude oil, natural gas, petrochemicals, and refined products pipelines, as well as significant processing capacity assets.
Constituting 52% of its revenue mix, the transportation of NGLs is EPD's core business. NGLs are essential feedstock for vital consumer products, such as plastics, that will see rising demand from the growing world population.
EPD's customers across business divisions essentially have investment-grade ratings or have a letter of credit. With a 3.5x debt to EBITDA ratio, EPD is one of the least leveraged midstream companies and can pay for capital projects through a portion of its free cash flows that are retained for this very purpose.
EPD currently yields 7.4%, and the company has an impressive 22-year history of growing distributions paid to investors, with a CAGR of 7%.
Insiders own a sizable 32% of EPD's shares outstanding, which is a big plus for value investors since it gives us a sense of confidence that the management team's interests are aligned with those of the shareholders.
One great positive to note is that EPD does not have an incentive distribution rights (IDRs) structure as its general partner owns non-economic ownership into EPD. This means, as the business grows, investors receive a growing chunk of the free cash flows without worrying about large distributions made to the general partner.
EPD today is in one of the sweetest spots. Demand for natural gas and "natural gas liquids" ('NGLs'), the main drivers of EPD's revenues, are soaring. Being on the verge of a new commodity supercycle, EPD will be one of the biggest beneficiaries.
EPD is set to benefit immediately from filling its idle capacity and able to increase add-on projects. Very soon, its strong balance sheet, key locations, and footprint put it in a key position to sustain its fast growth.
It's rare to find an investment-grade quality company that yields 7.4% and with a distribution that grows every year. EPD is such a company that you want to be invested in. This stock is grossly undervalued today and makes a great long-term investment. EPD could be the biggest winner in your retirement portfolio! Be aware that EPD is a master limited partnership and issues a Schedule K-1.
Enbridge, Inc. (ENB) is North America's largest pipeline-focused company by enterprise value. They operate 50,000 miles of natural gas, NGL, crude oil, petrochemicals, and refined products pipelines that are vital for the Canadian and the U.S. economy.
95% of the ENB's customers are "investment grade" while 98% of its capacity is contracted. That means the ENB has maximum reliability with minimum risk.
Looking into the company's revenue mix, we see that 54% of the top line is from crude oil and liquid hydrocarbons. The company has recently embarked on a growing renewable power business with 1,977 MW of net generation capacity.
Enbridge caries and investment-grade ratings (average BBB+), which allows investors to "sleep well at night."
Enbridge currently yields 6.9%, and the company has a 26-year history of paying growing dividends to investors. Despite four oil crashes and the two terrible bear markets, the company has a 10% dividend CAGR since 1995. This is very impressive!
This is the power of Mr. Buffett's toll booth theory, where vital assets can continue to be monetized for decades. The company grows its infrastructure network with more than C$17 in secured capital projects through the end of 2023.
The bulk of the capital expenses are to expand natural gas transmission, natural gas storage, natural gas distribution, and renewable power projects. Enbridge is set to continue growing its asset base, while investors expect growing distributions for years to come.
This is one of the safest midstream for income investors, providing recurrent paychecks for your retirement accounts. Note that Enbridge is a C-Corp and issues 1099s (no K-1s) at year-end.