Enterprise Products Partners (EPD) is one of the largest publicly traded midstream (i.e., pipeline and storage) companies in the world, suggests Robert Rapier, editor of Investing Daily's Utility Forecaster.
It is also the largest master limited partnership (MLP) and one of the largest energy companies period according to market capitalization. EPD operates as holding company, which engages in the production and trade of natural gas and petrochemicals.
The company has about 50,000 miles of natural gas, NGL, crude oil, refined products and petrochemical pipelines. EPD’s operations are concentrated in Texas, but its pipelines spread across the U.S. The company’s pipelines are connected to about 90% of all refineries East of the Rockies.
EPD’s diversification has helped it withstand the cyclical natural of the oil and gas business. EPD launched its initial public offering (IPO) in 1998, so it has operating during the oil price crash of 2008, the ongoing natural gas price slump since 2010, the oil price crash that began in 2014, and the COVID-induced oil price crash of 2020.
Throughout that turmoil, EPD raised its distribution every year, and covered it conservatively. I consider EPD to be the best midstream MLP out there, and I personally have it in my portfolio.
EPD has been a consistent Best Buy this year and notched a total return of 30.7% in the first half of 2021—which was the 2nd best performance in the portfolio.
However, I want to mention two factors. First, it is an MLP. MLPs trade in units instead of shares. I am not going to do an overview here of MLPs, but I want to note that they are structured differently than a corporation. When you get a distribution, it will be mostly classified as a “Return of capital.”
This is a return of a portion of your original investment that is not considered income or capital gains from the investment. However, a return of capital reduces your adjusted cost basis. Once the adjusted cost basis has been reduced to zero, any subsequent return will be taxable as a capital gain.
That means that your tax burden from an MLP like EPD is low relative to dividends you may receive from corporations. For my latest distribution, 100% was a return of capital, and therefore nontaxable. At least, until my cost basis has been reduced, or I sell my investment.
The other factor I want to highlight for investors is that even though EPD’s business remained stable through the turmoil of recent years, volatility in the energy markets impacted EPD’s unit price— completely unjustly in my opinion given the underlying fundamentals.
But the net result is the EPD is more volatile than most utilities, and it’s even more volatile than the S&P 500. But it’s been an incredible performer in Utility Forecaster for decades. Since entering the portfolio in 2000, EPD has returned nearly 1,700% for investors.
If you can stand some occasional volatility, it’s likely to be a strong income generator for many more years. At a current tax-advantaged yield of 8.1% — and I want to reiterate that this is conservatively covered with cash flow — it’s a great addition to an income portfolio.
