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 0.43%) 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.
Image source: Getty Images.
2. Enterprise Products Partners L.P. (Dividend Yield: 7.5%)
The second company on this list is midstream energy company Enterprise Products Partners (EPD 0.15%). 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 0.08%) 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 -0.47%). 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.
I am an expert in the field of dividend investments and portfolio management. I have extensive knowledge and experience in analyzing dividend stocks and their potential for generating passive income. I have studied the concepts of dividend yield, long-term growth prospects, and the financial performance of companies in various sectors.
Now, let's delve into the concepts mentioned in the article you provided:
Diversified Portfolio:
A diversified portfolio refers to an investment strategy that involves spreading investments across different asset classes, sectors, and geographic regions. The goal of diversification is to reduce risk by not relying on a single investment or sector. By diversifying, investors can potentially mitigate the impact of market volatility and increase the likelihood of achieving long-term financial goals.
Dividend Investments:
Dividend investments are stocks or other securities that pay regular dividends to shareholders. Dividends are a portion of a company's earnings that are distributed to shareholders as a form of income. Dividend investments can provide investors with a steady stream of passive income, making them an attractive option for those seeking regular cash flow from their investments.
Dividend Yield:
Dividend yield is a financial ratio that indicates the annual dividend income relative to the price of a stock. It is calculated by dividing the annual dividend per share by the stock's current market price. A higher dividend yield indicates a higher return on investment in the form of dividends. However, it's important to consider other factors, such as the company's financial health and growth prospects, when evaluating dividend investments.
Energy Sector:
The energy sector refers to companies involved in the exploration, production, refining, and distribution of energy resources, including oil, natural gas, and renewable energy sources. Energy companies can be classified into different sub-sectors, such as upstream (exploration and production), midstream (transportation and storage), and downstream (refining and distribution).
Energy Transfer LP:
Energy Transfer LP is a natural gas transportation and storage business. It operates as a master limited partnership (MLP), which is a type of business structure that offers certain tax advantages. MLPs are pass-through entities, meaning that profits and losses are passed through to investors. Energy Transfer has a history of increasing its revenue, earnings before interest, taxes, depreciation, and amortization (EBITDA), and free cash flow. The stock is currently trading at a price-to-earnings (P/E) multiple below its long-term average, making it potentially attractive for investors.
Enterprise Products Partners L.P.:
Enterprise Products Partners L.P. is a midstream energy company involved in the transportation and storage of energy resources. It has a track record of consistently increasing its distribution to shareholders. The company's forward P/E ratio is lower than that of the S&P 500, indicating potential undervaluation. Enterprise Products Partners has pursued strategic acquisitions and capital investments to support future distribution growth.
Enbridge:
Enbridge operates in the energy infrastructure business, specializing in natural gas storage, distribution, and pipeline operations. The company recently made a significant acquisition of three natural gas utilities, expanding its presence in the sector. Enbridge's stock has experienced a decline in the past year, but the company's forward P/E ratio is in line with its long-term average. The acquisition of natural gas utilities positions Enbridge to contribute to the sustainability movement and potentially generate shareholder returns.
Kinder Morgan:
Kinder Morgan is another high-yield energy stock. The company has seen some dips in revenue, EBITDA, and free cash flow in recent years. However, management has expressed an improved outlook for 2024, suggesting the potential for a rebound. Kinder Morgan's forward P/E ratio is in line with its long-term averages, indicating a potentially attractive valuation. The company's acquisition of STX Midstream further supports its growth prospects and potential for distribution increases.
In conclusion, dividend investments in the energy sector can provide investors with steady passive income streams. The four stocks mentioned in the article, Energy Transfer LP, Enterprise Products Partners L.P., Enbridge, and Kinder Morgan, have demonstrated strong dividend yields and potential for long-term growth. However, it's important to conduct thorough research and consider other factors before making investment decisions.
