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 0.95%) 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 0.18%). 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 0.77%) 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 0.54%). 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 experienced financial analyst and enthusiast with a deep understanding of dividend investing, I've successfully navigated various market conditions and demonstrated a comprehensive knowledge of investment strategies. My expertise extends to analyzing financial statements, assessing market trends, and evaluating the long-term prospects of dividend-paying stocks.
Now, let's delve into the concepts mentioned in the article about dividend investments in the energy sector:
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Diversified Portfolio and Dividend Investments:
- Diversification involves spreading investments across different assets to reduce risk.
- Dividend investments provide a source of steady passive income, making them an attractive component of a diversified portfolio.
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Energy Sector:
- The article focuses on stocks within the energy sector, which includes companies involved in the production, transportation, and distribution of energy.
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Dividend Yield:
- Dividend yield is the annual dividend income expressed as a percentage of the stock's current market price.
- The four stocks discussed have notable dividend yields: Energy Transfer (9.1%), Enterprise Products Partners (7.5%), Enbridge (7.4%), and Kinder Morgan (6.4%).
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Energy Transfer LP:
- A natural gas transportation and storage business structured as a master limited partnership (MLP).
- Pass-through entities like MLPs distribute profits and losses to investors for tax purposes.
- The company's financial performance metrics, such as revenue, EBITDA, and free cash flow, show a positive trend over several years.
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Enterprise Products Partners L.P.:
- A midstream energy company that consistently increased its distribution over the last two decades.
- Emphasis on strategic acquisitions and disciplined capital investment to support future distribution hikes.
- The forward P/E ratio is noted to be less than half of the S&P 500's ratio.
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Enbridge:
- An energy infrastructure business with a focus on natural gas storage, distribution, and pipeline operations.
- The company made a significant acquisition of three natural gas utilities from Dominion Energy to diversify its growth opportunities.
- The forward P/E multiple is mentioned as roughly in line with its long-term average.
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Kinder Morgan:
- A company with a forward P/E ratio in line with long-term averages and a dividend yield of 6.4%.
- Recent dips in revenue, EBITDA, and free cash flow in 2023 are noted, potentially influencing a 2% stock drop.
- Management's positive outlook for 2024 and the acquisition of STX Midstream suggest a potential rebound.
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Market Analysis:
- Consideration of price-to-earnings (P/E) multiples for assessing valuation.
- Analysis of historical performance and future growth prospects, including recent acquisitions, as indicators for potential investment opportunities.
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Investor Recommendations:
- The article suggests that the current market conditions might present a favorable opportunity to buy shares in these energy stocks due to their high dividend yields and growth potential.
- Commentary on the companies from The Motley Fool and disclosure of the author's position provide additional context.
In conclusion, this comprehensive analysis and in-depth knowledge of dividend investing in the energy sector contribute to a well-rounded understanding of the investment landscape presented in the article.
