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Investing in dividend stocks can be a great way to generate passive income from your investment portfolio. Rather than chasing growth, income investors focus on investing in companies that consistently return cash to shareholders.
That's where energy pipeline giant Enterprise Products Partners (NYSE: EPD) shines. The company recently raised its distribution payout and offers investors a monster 6% yield. If you're considering investing in Enterprise Products for income, here's what you need to know.
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In July, Enterprise Products Partners declared a cash distribution of $0.56 per unit, a 2.8% increase from last year. Strong cash flow backs its distributions. In the second quarter, Enterprise had a 1.9x distribution coverage ratio, allowing it to retain $1.09 billion in operating cash flow after distributions to fund investments.
Enterprise stands out for its fully integrated, end-to-end infrastructure network that connects producers in major North American basins directly to domestic end users and international markets. Its massive network saw record volumes in the second quarter, moving an equivalent of 14.7 million barrels per day across its pipelines and 2.8 million barrels per day across its marine terminal docks.
Its integrated business spans five midstream sectors: natural gas liquids, crude oil, natural gas, petrochemicals, and refined products. This integrated model helps Enterprise capture fees at multiple points along the value chain.
In addition, most of Enterprise's services are locked into fee-based, long-term contracts that insulate it from commodity price fluctuations. These contracts include fixed fees and minimum volume commitments, and often have inflation-indexed rate escalations. Customers pay for reserved pipeline capacity and midstream processing regardless of energy prices, giving Enterprise a predictable cash flow.
Enterprise should continue to benefit as the U.S. ramps up natural gas production. More natural gas, particularly in the Permian Basin, drives higher processing throughput. To handle these higher volumes, Enterprise has $6.5 billion in capital projects, which it aims to complete by early 2029.
The company is constructing five natural gas processing trains to capitalize on ongoing oil and gas growth in the Permian Basin. Each train adds 300 million cubic feet per day (MMcf/d) of gas processing capacity. Each new gas processing train helps extract 45,000 barrels of natural gas liquids per day.
Like many pipeline stocks, Enterprise operates as a master limited partnership (MLP), giving it a legal structure that makes it a solid income stock. That said, MLPs have different tax treatment, including a Schedule K-1 rather than a standard 1099-DIV, which can complicate tax filing.
That said, Enterprise Products Partners is a top dividend stock for income investors, thanks to its stable yield backed by long-term contracts and insulated from commodity price swings.
Before you buy stock in Enterprise Products Partners, consider this:
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Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
1 Stock That's Quietly Paying Investors a Monster 6% Dividend Yield was originally published by The Motley Fool
