What does it take to generate passive income? There are two essential ingredients. First, you need upfront money to invest. Second, you need an investment that pays regular dividends.
The good news is that with many investment alternatives, you pay to own them. There is one in particular that I think is one of the best options. This high-yield dividend stock is a huge passive income machine.
A pipeline powerhouse
Enterprise Products Partner (NYSE:EPD) is a leading midstream energy company. It was founded in 1998 and is based in Houston.
The limited partnership (LP) operates more than 50,000 miles of pipeline transporting natural gas liquids (NGLs), natural gas and crude oil across much of the U.S. company’s midstream platform. In addition, it includes over 300 million barrels of liquids storage, 42 natural gas processing trains, 26 fractionators, 20 deepwater docks, two propane dehydrogenation plants and two isobutane dehydrogenation plants.
Enterprise doesn’t rest on its laurels. The company has major projects worth around $6.5 billion under construction. Most relate to NGL, including new facilities in the Delaware and Midland basins and the Bahia pipeline.
Investors can rest assured that Enterprise Products Partners is putting their money to good use. The LP has delivered an average return on invested capital (ROIC) of 12% over the past 10 years. ROIC has also been in the double digits every year since 2005 – a period that included the Great Recession, the 2014 to 2017 oil price collapse, and the COVID-19 pandemic.
A passive income machine at an attractive price
What about passive income? Enterprise Products Partners offers plenty of this. The company’s distribution yield is currently over 7%. For every $10,000 you invest, you will receive over $700 in annual income.
This income is likely to grow over time. Enterprise Products Partners has grown its sales for 25 consecutive years at a compound annual growth rate of approximately 7%.
I am confident that the LP will continue this impressive series. The company’s adjusted cash flow from operations (CFFO) continues to grow. It is that only Midstream company that has consistently increased adjusted CFFO per unit and reduced the number of units without selling any significant assets.
Debt service should also not affect Enterprise Products Partners’ sales payouts. The company manages its debt well. And it is the only mid-sized debt issuer with an A credit rating.
As a bonus, Enterprise is attractively priced. Its units trade at 10.9 times forward earnings. This is significantly below that S&P 500 The energy sector’s expected earnings multiple is almost 13.3.
A disadvantage
Some might think that Enterprise Products Partners’ focus on fossil fuels could limit the company’s growth. However, I don’t see that as a disadvantage. Demand for natural gas and NGLs in particular is likely to continue to rise. Companies’ midstream assets will be needed for a long time.
However, there is a downside to investing in Enterprise. LPs must provide each shareholder with a Form K-1. This can make tax preparation more difficult.
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Keith Speights holds positions at Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
This high-yield dividend stock is a passive income monster machine and was originally published by The Motley Fool