Unlocking High-Yield Dividend Stocks in Midstream Energy
When searching for high-yield dividend stocks, the midstream energy sector is an attractive destination. Many companies in this space are structured as master limited partnerships (MLPs), which pass through their profits to unitholders, avoiding corporate taxes. As a result, they offer generous distributions, similar to dividends, with a significant portion considered a return of capital. This tax-deferred benefit reduces the owner’s cost basis, although it adds some complexity to tax filings.
A Shift in the Midstream Sector
Over the past decade, the midstream sector has undergone significant changes. Historically, companies operated with a general partner (GP) and limited partner (LP) structure, which favored the GP. This setup led to LPs funding growth through equity issuance, resulting in higher dollar payments to the GP. Fortunately, this structure has largely been eliminated, and MLPs now operate with less leverage and more financial flexibility.
A Buying Opportunity
Despite the industry’s improved financial health, midstream energy stocks trade at a discount compared to their historical valuations. Between 2011 and 2016, MLPs traded at an average enterprise-value-to-EBITDA multiple of 13.7. Today, they trade at much lower valuations, creating an attractive buying opportunity. The increasing power demand from artificial intelligence (AI) hardware in data centers further supports this trend.
Two Top MLP Picks
Energy Transfer: A Cheap and Growing MLP
Energy Transfer (NYSE: ET) is one of the cheapest MLPs, trading at a forward EV/EBITDA multiple of 8.5. It offers a forward yield of 6.4% and expects to increase its distribution by 3% to 5% annually. With a well-covered distribution and strong free cash flow generation, Energy Transfer is poised for growth. Its presence in the Permian Basin provides access to cheap natural gas, making it an ideal location for data centers.
Enterprise Products Partners: A Model of Consistency
Enterprise Products Partners (NYSE: EPD) has always been a stockholder-friendly company, eliminating its IDRs in 2002 and maintaining a strong balance sheet. The company has raised its distribution for 26 consecutive years and currently yields 6.4%. With a robust growth pipeline and a strong presence in Texas, Enterprise Products Partners is well-positioned to benefit from the increasing power needs related to AI and data centers.
Don’t Miss Out on High-Yield Opportunities
Investing in high-yield dividend stocks can provide a significant source of income. By focusing on the midstream energy sector and companies like Energy Transfer and Enterprise Products Partners, investors can capitalize on attractive valuations and growth opportunities.
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