Investors looking for income typically aim to maximize their dividend returns relative to the price they pay for shares in dividend-yielding companies. This strategy involves identifying stocks with higher dividend yields or greater distributions per share based on their current market prices.
However, is it wise to base your investment decisions solely on higher yields?
Midstream energy pipeline firms are renowned for providing substantial cash returns. For instance, Energy Transfer (ET -1.09%) currently offers investors a generous 6.9% distribution yield, and its shares can be purchased for less than $100. This yield outperforms the 6.3% from Enterprise Products Partners (EPD -1.22%) and the 5.9% from Enbridge (ENB -0.76%).
Nevertheless, before opting for the highest-yielding midstream investment, it’s essential to consider why Enterprise and Enbridge may still be worthy choices despite their lower yields.
Issues with Energy Transfer as an Income Investment
In 2020, during the COVID-19 crisis, Energy Transfer reduced its dividend distribution by 50%. Given the turbulence and drop in energy prices at that time, this decision was likely justified. However, for investors who relied on dividends for income, this cut was unwelcome. Essentially, when stability was most needed, Energy Transfer failed to provide it. For those prioritizing consistent dividends, including Energy Transfer in their portfolios might not be advisable. While the distribution has since risen above its pre-cut level, this may not ease the concerns of investors who faced income disruptions during the pandemic.
Reliable Payments from Enterprise and Enbridge
In contrast, both Enterprise Products Partners and Enbridge did not reduce their distributions during the challenging times of 2020. Investors in these companies can also purchase shares for under $100, but they can do so with much greater confidence in the security of their dividend income. Moreover, both companies have established a lengthy history of increasing distributions, with Enterprise doing so for 26 consecutive years and Enbridge for 30 years, measured in Canadian dollars.
All three midstream companies provide similar services, generating fees from energy asset usage to transport oil and gas globally. Given the stable demand for energy—regardless of price fluctuations—midstream companies typically produce steady cash flow. However, Energy Transfer’s past distribution cut highlights its inconsistency compared to its peers, Enterprise and Enbridge.
Choosing Wisely Among Yield Options
While Energy Transfer isn’t an inherently poor investment, its track record shows it didn’t prioritize investor interests during a critical period. Conversely, Enterprise and Enbridge have consistently focused on delivering value to their shareholders. Coupled with their substantial yields and robust financial health, these companies present more reliable income options in the midstream sector, especially for those wishing to avoid significant distribution cuts.
Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Enbridge and also recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
