Key Points
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Energy Transfer offers a great combination of a high yield and growth.
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Enterprise Products Partners is a steady distribution machine.
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Western Midstream offers a very high yield backed by a strong balance sheet.
- 10 stocks we like better than Energy Transfer ›
When it comes to dividend investing, my absolute favorite sector is midstream master limited partnerships (MLPs). These stocks offer both high yields and increasing distributions.
As MLPs, the correct term is actually distributions, not dividends, as typically a large percentage of their payouts are deemed a return of capital and are taxed deferred until the stock is sold (if your cost basis reaches zero, you’ll also start paying taxes in the future). It does come with a little extra paperwork come tax time, but it is well worth it, in my view.
Let’s look at three of my favorite midstream MPLs, which 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’s cheap both relative to its peers and historically, trading at a forward enterprise value (EV)-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio of just 8.5. That compares to the average 13.7 multiple that midstream MLPs traded at 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 patch with some of the cheapest natural gas in the U.S. — has enabled it to pursue multiple high-return growth projects focused on delivering low-cost natural gas to areas with high demand, including artificial intelligence data centers. This year, it is pouring between $5.5 billion and $5.9 billion into organic growth projects.
Finally, the stock’s 6.8% yield is attractive, and it plans to increase its distribution by 3% to 5% a year. Its balance sheet is in solid shape, and its strong earnings provide a robust distribution coverage ratio.
Altogether, the stock offers both solid income generation and some nice stock appreciation potential.
2. Enterprise Products Partners
One of my longest-held holdings is Enterprise Products Partners (NYSE: EPD), which I’ve owned since 2008. This is a sleep-well-at-night stock with an attractive yield (5.8%) and a steady distribution growth rate (about 3%).
The company has raised its distribution for 27 consecutive years. Given the economic and energy market scares during this stretch, that’s impressive. Enterprise is conservative by nature, and its balance sheet is one of its biggest strengths. It has just 3.2 times leverage, which is low for the midstream industry, and it’s locked in low-cost debt (4.7% average interest rate) over the long term (17-year average maturity).
Although this is a bit of a transition 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. As such, it could be a good time to add the shares ahead of this growth spurt.
3. Western Midstream
If you’re looking for a stock with an even higher yield 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 about 3.
Western has also been repositioning its asset base recently through acquisitions. It dove headfirst into the waste water-handling business in the Permian through its acquisition of Aris 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 big produced-water transportation pipeline, Pathfinder, is projected to be in service starting in Q1 of next year, linking it to its new North Loving II processing train, which is expected to come online in Q2 of 2027.
In addition, Western recently acquired a natural gas and crude oil gathering platform in the Permian, helping expand its presence in the U.S.’s most important oil basin. The deal is expected to be immediately accretive to its cash flow while maintaining its current leverage.
This is another stock I personally own and think continues to look attractive at current levels, trading at a forward EV/EBITDA multiple of just 9.3 times.
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Geoffrey Seiler has positions in Energy Transfer, Enterprise Products Partners, and Western Midstream Partners. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
