Some investments are great for a specific type of investor, but will not be suitable for many others. That is exactly the situation that exists with Enterprise Product Partners (NYSE: EPD) today.
If you're looking at this midstream master limited partnership (MLP), here are some reasons why you might want to buy it, sell it, or hold it for the long term.
Reasons to sell enterprise product partners
The list of reasons to sell, or never buy, enterprise product partners is pretty easy to identify. And it will be pretty obvious what types of investors will want to pass up this high-yield option. With a hefty 7.1% distribution yield, investors who are focused on growth You probably don't find Enterprise interesting at all. In fact, the distribution likely accounts for most of the returns here. Distribution increases have only been in the low to mid-single digits over the past decade, which speaks to the MLP's growth prospects.
There is another problem here, since Enterprise Products Partners is a MLPa pass-through business structure that is specifically intended to create tax-advantaged income for unitholders. But MLPs have unique tax considerations, including the fact that they don't work well with tax-advantaged retirement accounts and require investors to deal with a K-1 form at tax time. Investors who prefer simple investments will probably be better off elsewhere despite the attractive yield Enterprise offers.
Lastly, Enterprise is not for you if you believe renewable energy is the future and simply don't want to touch anything related to carbon fuels. Its entire business is dedicated to owning the energy infrastructure that helps move oil and natural gas around the world.
Reasons to buy enterprise product partners
While growth investors won't like Enterprise, income investors will probably like it. The first indication of this is the high distribution yield of 7.1%. The second is that MLPs often generate tax-advantaged income because a portion of the payment can be classified as a return of capital (this reduces your cost base). And the distribution has increased annually for 26 consecutive years, which is a very strong track record for an income investment.
But the good news doesn't end there. Backing the revenue stream that Enterprise Products Partners creates is an investment grade-rated balance sheet. The MLP's distributable cash flow covers its distribution at 1.7 times, suggesting there is plenty of room for adversity before a cut is necessary. On top of that, Enterprise has always tried to operate with very low leverage compared to its closest peers, making it one of the strongest options, financially speaking, in the midstream sector.
If you like reliable and secure income, Enterprise Products Partners is probably a good fit for your portfolio.
Reasons to hire enterprise product partners
As with most situations, the hold and purchase logic will be more or less similar. But there is one important thing here that needs to be highlighted: Enterprise Products Partners' business model. It is a midstream provider, meaning it owns energy infrastructure such as pipeline, storage, transportation and processing assets. These are expensive items to build and acquire, but they generally generate consistent cash flows. The key is that Enterprise charges customers for the use of its assets, acting as a toll collector.
That's not exciting, but the energy sector cannot function without the infrastructure that Enterprise has. As long as oil and natural gas remain important to the world, Enterprise will have happy and willing customers. It should be noted that, despite the energy transition that is taking place, oil and natural gas are expected to remain important in the coming decades. And since Enterprise charges fees for the use of its assets, the price of oil and natural gas aren't really that important to its performance. If you like boring investments, Enterprise is the type of holding you buy and hold for the long term.
The company is a great option to earn income.
Growth investors won't like enterprise product partners. Value investors, who have not yet been contacted, will probably be mildly interested to note that the distribution yield is a bit above its 10-year average (but the MLP is clearly not on the discount shelf at this moment). Dividend investors will be the group most attracted to these high-yield stocks for the long list of reasons mentioned above. But, above all, because Enterprise is reliable and financially solid.
Should I invest $1,000 in enterprise product partners right now?
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Ruben Gregg Brewer He has positions at Enbridge. The Motley Fool has positions and recommends Enbridge and Kinder Morgan. The Motley Fool recommends Enterprise Products Partners and Tc Energy. The Motley Fool has a disclosure policy.
Enterprise Product Partner Stocks: Buy, Sell or Hold? was originally published by The Motley Fool