High-yielding dividend stocks aren't known for producing high-octane total returns. They typically reward investors by generating lots of dividend income and some stock-price appreciation, which often adds up to a solid total return.
However, Enterprise Products Partners(NYSE: EPD) isn't your average high-yield dividend stock. It has delivered total returns that have crushed those of its peers and the S&P 500 since its formation. Here's a look at what has fueled its robust returns and whether the company has the cash-creating power to keep paying a dividend that currently yields 7.2%.
High octane returns
Enterprise Products Partners recently passed the quarter-century mark as a publicly traded company. It has been a standout performer during that period:
EPD Total Return Level data by YCharts
As you can see, Enterprise Products Partners' total return has significantly outperformed other energy stocks as measured by the Energy Select SPDR ETF. It has also crushed the total return of the S&P 500.
One factor fueling Enterprise Products Partners' gains has been its ability to steadily increase its dividend distribution. The master limited partnership (MLP) has delivered 25 consecutive years of distribution growth, raising its payout at a 7% compound annual rate. Dividend growth tends to drive long-term outperformance. Over the last 50 years, dividend growers have significantly outperformed the average member of the S&P 500 (10.2% average annual total return versus 7.7%).
A few catalysts have given Enterprise Products Partners the fuel to steadily increase its dividend. It has grown into a large, integrated, and diversified midstream company over the years by investing heavily in expanding its platform. The company has acquired other midstream companies and organically built new energy infrastructure assets. These new assets have grown its cash flow, giving it the fuel to fund more new investments while steadily increasing its distribution.
The MLP has also maintained a top-tier financial profile over the years. That has enabled it to have a lower cost of capital, which has made new investments even more accretive. The company's financial strength has allowed it to remain on the offensive during energy market downturns, instead of needing to play defense like many of its financially weaker rivals.
Ample fuel to continue growing
Enterprise Products Partners still has lots of growth ahead. The MLP had $6.9 billion of approved major organic expansion projects in its backlog. These commercially secured projects include pipeline expansions, new natural gas processing plants, and export terminal capacity additions. They should come online through 2026, providing a lot of visibility into future cash flow growth.
The MLP has several other expansion projects under development, ranging from expanding existing assets to building new infrastructure. For example, it has been working to develop a major offshore oil export terminal for several years. It recently won government approval to build the facility, and it's now working to secure the commercial contracts needed to make a final investment decision on the project.
The company is also working to expand into supporting lower-carbon energy. It's pursuing carbon capture, hydrogen, and other opportunities. These projects could leverage its existing assets and extend their life while providing new investment opportunities to continue expanding its footprint.
In addition to organic growth, Enterprise Products Partners will likely remain an active acquirer. The company recently acquired several joint venture interests from fellow MLP Western Midstream Partners for $400 million. With the highest credit rating in the midstream sector, Enterprise Products Partners has ample financial flexibility to continue making accretive acquisitions as opportunities arise.
With visible growth coming down the pipeline and multiple future expansion opportunities, Enterprise Products Partners should be able to continue increasing its cash flow at a healthy rate. That should give the MLP the fuel to keep raising its high-yielding distribution, adding to its total returns.
The strong total returns could continue
Enterprise Products Partners has done an exceptional job creating value for its investors over the years. Its returns have significantly outpaced its peers and the S&P 500. The MLP has used a simple strategy of steadily expanding its portfolio of income-producing energy midstream assets. That has given it the fuel to routinely increase its cash distributions to investors. With a strong financial profile, a high-yielding income stream, and more growth ahead, the MLP could have the fuel to continue producing strong total returns.
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Matt DiLallo has positions in Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
