When it comes to dividend investing, my favorite sector is midstream master limited partnerships (MLPs). These stocks offer both high yields and rising distributions.
As for MLPs, the correct term is actually distributions, not dividends, because typically a large percentage of their payouts are considered return of capital and tax deferred until the stock is sold (if your cost basis reaches zero, you’ll start paying taxes in the future as well). There is a little extra paperwork involved at tax time, but it is worth it in my opinion.
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Let’s take a look at my three favorites midstream mplWhich are businesses that ship, store, or process oil.
1. Energy Transfer
energy transfer (NYSE:ET) is one of my largest holdings and remains a favorite. The reasons are simple.
First, it is cheaper than its competitors and, historically, has been trading on forward Enterprise Value (EV)-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio of just 8.5. This compares to the average multiple of 13.7 achieved by midstream MLPs between 2011 and 2016.
Second, the company has one of the best growth project backlogs in the midstream sector. Its position in the Permian Basin – an oil field with the cheapest natural gas in the US – has enabled it to pursue several high-return development projects focused on delivering low-cost natural gas to high-demand areas, including artificial intelligence data centers. This year, it is investing between $5.5 billion and $5.9 billion in organic growth projects.
Finally, the stock’s 6.8% yield is attractive, and it plans to increase its distribution by 3% to 5% per year. Its balance sheet is in solid shape, and its strong earnings provide a strong distribution coverage ratio.
Overall, the stock offers both solid income generation and some nice stock appreciation potential.
2. Enterprise Product Partner
One of my longest holdings is Enterprise Product Partners (NYSE: EPD), which I have owned since 2008. This is a good night’s sleep stock with an attractive yield (5.8%) and stable distribution growth rate (about 3%).
The company has increased its distribution for 27 consecutive years. Given the economic and energy market fears during this period, this is impressive. The enterprise is conservative by nature, and its balance sheet is one of its greatest strengths. It has leverage of only 3.2x, which is low for the midstream industry, and it is locked in low-cost debt (4.7% average interest rate) over a long term (17-year average maturity).
Although this is a transformative year for the company, it is projecting double-digit percentage EBITDA and cash flow growth next year as some large projects come online in the second half of this year. So, now might be a good time to add shares ahead of this growth momentum.
Image Source: Getty Images.
3. Western Midstream
If you’re looking for even higher yielding stocks than Enterprise and Energy Transfer, western midstream (NYSE:WES) is a strong option. The stock currently yields 8.2% and targets mid to low single digit percentage annual distribution growth. It also has a strong balance sheet, with leverage of around 3.
Western has also recently been repositioning its asset base through acquisitions. It made its first entry into the wastewater-handling business in the Permian through the acquisition of Eris Water Solutions, and it recently brought online a second produced-water treatment pilot facility, which it hopes will lead to its first commercial-scale facility. Meanwhile, its larger produced-water transportation pipeline, Pathfinder, is projected to come into service starting in the first quarter of next year, connecting it to its new North Loving II processing train, which is expected to come online in the second quarter of 2027.
Additionally, Western recently acquired a natural gas and crude oil gathering platform in the Permian, helping expand its presence in America’s most important oil basin. The deal is expected to be immediately accretive to cash flow while maintaining its current leverage.
This is another stock I personally own and think looks attractive at current levels, trading at a forward EV/EBITDA multiple of just 9.3x.
Should you buy stock in Energy Transfer now?
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Geoffrey Seiler Holds positions at Energy Transfer, Enterprise Products Partners and Western Midstream Partners. The Motley Fool recommends enterprise products partners. The Motley Fool has one Disclosure Policy.
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