One of the hallmarks of a diversified portfolio is dividend investments. Dividends can provide investors with steady passive income streams and help strengthen the overall position of your portfolio.
The four stocks explored below operate in the energy sector. Given the high dividend yield of each stock, investing $135,000 split equally among these energy leaders could help generate $10,000 of dividend income.
Let's dig into why these companies deserve a look for your portfolio and how each has proven to be a long-term winner.
1. Energy Transfer LP (Dividend Yield: 9.1%)
Energy Transfer (ET 1.26%) is a natural gas transportation and storage business. An investment of $33,750 would generate a little more than $3,000 of dividend income, assuming the current yield of 9.1%.
One thing investors should note about Energy Transfer is that it is structured as a master limited partnership (MLP). One of the unique features of limited partnerships (LPs) is that they are pass-through entities. This means that both profits and losses are passed through limited partners (i.e., investors). These are known as distributions and need to be accounted for come tax time.
ET EBITDA (Quarterly) data by YCharts
The chart above illustrates that Energy Transfer has steadily increased its revenue, earnings before interest, taxes, depreciation, and amortization (EBITDA), and free cash flow over the last several years. In turn, the company has done a nice job of rewarding shareholders by steadily increasing its distribution. While the company did cut its distribution in 2020, management has done a respectable job navigating around uncertain macroeconomic climates and has steadily risen payouts to pre-pandemic levels.
Right now, Energy Transfer stock trades at a price-to-earnings (P/E) multiple of 12.9 -- less than half the company's long-term average of 26.6. With a fresh acquisition recently completed, Energy Transfer's long-term growth prospects look encouraging. With the stock trading at a steep discount to historical levels, now could be a great opportunity to scoop up shares at a 9% yield.
2. Enterprise Products Partners L.P. (Dividend Yield: 7.5%)
The second company on this list is midstream energy company Enterprise Products Partners (EPD 0.37%). An investment of $33,750 would generate a little more than $2,500 of dividend income, assuming the current yield of 7.5%.
EPD Dividend data by YCharts
The chart above showcases how Enterprise Product Partners places a premium on investor loyalty. Even during periods of choppy cash flow generation, the company still managed to increase its distribution on a consistent basis. Over the last two decades, investors have enjoyed a total return of over 2,500%.
Through a combination of strategic acquisitions and disciplined capital investment, Enterprise Product Partners is laying the groundwork for future distribution hikes.
The company's forward P/Eratio of 9.9 is less than half of that of the S&P 500. This could be a sign that investors have low expectations for the company and do not expect it to outperform the broader markets. While the energy sector can be more vulnerable to geopolitical issues, I'm not worried about Enterprise Product Partners. The chart above undermines the resiliency of the business over the course of several decades, each of which carried its own economic highs and lows.
Right now, it looks like a great opportunity to buy shares at a near-8% yield and enjoy the long-term benefits of consistent distribution growth.
3. Enbridge (Dividend Yield: 7.4%)
Enbridge (ENB 0.62%) operates an energy infrastructure business specializing in natural gas storage and distribution as well as pipeline operations. An investment of $33,750 would generate roughly $2,500 of dividend income, assuming the current yield of 7.4%.
Enbridge stock is down nearly 14% over the last year, vastly underperforming the S&P 500. Over the last couple of years, investing in the energy sector has been a little dicey. The industry is one of the main sectors that has been impacted most by inflation.
In the midst of a turbulent macroeconomy, Enbridge struck a unique deal last year that could result in substantial shareholder returns. Back in September, the company announced that it would be acquiring three natural gas utilities from Dominion Energy.
This is a game-changer for Enbridge, which, historically, has relied on oil products for the bulk of its growth. However, as consumers demand more choices regarding energy sources, the addition of these natural gas utilities provides Enbridge with a solid opportunity to contribute to the sustainability movement.
The company currently boasts a forward P/E multiple of 17.2 -- roughly in line with its long-term average. I think investors could be discounting the potential of the Dominion deal, thereby providing a tempting opportunity to buy shares at an attractive valuation and a yield of over 7%.
4. Kinder Morgan (Dividend Yield: 6.4%)
The last company explored among these high-yield energy stocks is Kinder Morgan (KMI 0.64%). The last $33,750 slice of the proposed $135,000 investment would generate roughly $2,100 of dividend income, assuming the current yield of 6.4%.
KMI Free Cash Flow (Quarterly) data by YCharts
The chart above illustrates Kinder Morgan's revenue, EBITDA, and free cash flow over the last five years. The glaring takeaway is that 2023 saw some dips across these three categories, leading the stock to drop by about 2%.
Similar to Enbridge, Kinder Morgan's forward P/E ratio is very much in line with long-term averages. Given management's recent commentary regarding its improved 2024 outlook, I think investors could be discounting Kinder Morgan's potential for a rebound year. With the acquisition of STX Midstream under its belt, the company looks well poised to return to growth. Subsequently, if Kinder Morgan is able to execute its vision, further distribution increases will likely follow.
At a 6.4% yield, now looks like an interesting time to buy shares in Kinder Morgan and supplement your portfolio with further passive income.
Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Enbridge and Kinder Morgan. The Motley Fool recommends Dominion Energy and Enterprise Products Partners. The Motley Fool has a disclosure policy.
As an expert in the field of finance and investment, my extensive knowledge allows me to analyze and provide insights into the concepts discussed in the provided article on dividend investments in the energy sector. Let's break down the key components mentioned:
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Diversified Portfolio and Dividend Investments:
- The article emphasizes the importance of a diversified portfolio, with a specific focus on dividend investments. Diversification helps manage risk, and dividends can provide a steady passive income stream.
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Energy Transfer LP (ET):
- Energy Transfer is a natural gas transportation and storage business structured as a master limited partnership (MLP).
- The article mentions the current dividend yield of 9.1% and recommends an investment of $33,750, projecting a $3,000 dividend income.
- Financial metrics such as revenue, EBITDA, and free cash flow show steady growth over the years. The company faced a distribution cut in 2020 but has since navigated challenges and restored payouts to pre-pandemic levels.
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Enterprise Products Partners L.P. (EPD):
- Enterprise Products Partners is a midstream energy company with a current dividend yield of 7.5%.
- The suggested investment is again $33,750, projecting a $2,500 dividend income.
- The company's commitment to consistent distribution growth is highlighted, supported by strategic acquisitions and disciplined capital investment.
- The forward P/E ratio of 9.9 is less than half of the S&P 500, suggesting potential undervaluation.
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Enbridge (ENB):
- Enbridge operates in the energy infrastructure business, specializing in natural gas storage, distribution, and pipeline operations. The current dividend yield is 7.4%.
- An investment of $33,750 is expected to generate around $2,500 of dividend income.
- The article mentions the recent acquisition of three natural gas utilities from Dominion Energy, signaling a shift toward diversification in energy sources.
- The forward P/E multiple of 17.2 is considered roughly in line with the company's long-term average.
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Kinder Morgan (KMI):
- Kinder Morgan is the last company discussed, with a current dividend yield of 6.4%.
- The suggested investment of $33,750 is expected to generate approximately $2,100 of dividend income.
- The article highlights the revenue, EBITDA, and free cash flow trends over the last five years. It notes a drop in 2023 but points to management's positive outlook for 2024.
- Similar to Enbridge, Kinder Morgan's forward P/E ratio is mentioned as being in line with long-term averages.
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Closing Thoughts:
- The article concludes by suggesting that, based on the mentioned dividend yields, investing $135,000 equally among these energy stocks could generate $10,000 of dividend income.
- The author also mentions the potential for attractive valuations and opportunities for investors in the current market conditions.
By providing a detailed analysis of each energy stock, the article aims to guide investors in making informed decisions about including these dividend-paying stocks in their portfolios.
