The smartest high-yielding energy stock to buy for $500 right now

If you have $500 and want to generate an income with that money, one of the first places you should look is Enterprise product partners (NYSE: EPD). A big reason why is the whopping 7.1% return on offer at a time when the broader market is down just 1.2% and energy stocks overall just 3.1%.

But high returns aren’t the only reason to love Enterprise Products Partners.

What does Enterprise Products Partners do?

The energy sector is broad, consisting of companies that drill for oil and natural gas, companies that transport fuels, and others that process these vital energy sources into chemicals and other refined products. The industry is broadly divided into upstream, midstream and downstream sectors. Each operates very differently, with upstream and downstream performance tending to be commodity-based.

Enterprise Products Partners operates midstream with a portfolio of energy transportation infrastructure, such as pipelines, in North America that would be difficult to replace or replicate. The midstream basically helps to connect upstream and downstream, effectively providing a transport service. Midstream companies like Enterprise tend to charge fees for the use of their assets, which generates consistent cash flows over time.

This makes it possible for Enterprise to pay for and support a large and growing distribution. Notably, despite volatility in the broader energy sector, this private limited partnership (MLP) has increased its distribution annually for 26 consecutive years.

There is no reason to believe that the Enterprise series will end

Because of the vital nature of Enterprise’s assets, its services are likely to be needed as long as oil and natural gas are needed. The global energy giant ExxonMobil recently highlighted that these fuels are likely to remain important for decades to come, with demand in 2050 projected to equal roughly half of global energy needs. So from a fundamental position, Enterprise assets will still be in high demand for a long time to come.

Then there is the financial situation of the partnership. It has an investment-grade balance sheet and its distributable cash flow covers distribution 1.7 times. That’s a very solid base, suggesting there’s plenty of room for adversity before a distribution cut is in the cards.

The only problem with Enterprise is growth, given that there is limited opportunity for core capital investment in the midstream space. However, this industry giant is big enough and financially strong enough to act as an industry consolidator. In fact, it just agreed to buy Piñon Midstream for just under $1 billion. This shows that Enterprise can find a way to keep growing even as the energy industry changes shape over time.

The story continues

Who Should Buy Enterprise Products Partners Stock?

That said, Enterprise Products Partners won’t be right for every investor. Distribution growth will likely be slow and steady to begin with. Think small or medium numbers. This is probably enough to keep up with the impact of inflation and increase the purchasing power of the distribution slightly over time. But this is not a dividend growth investment or a growth investment. The real appeal here is for investors looking to generate a large stream of current income, perhaps to help pay for retirement expenses.

There is an alternative view though if you reinvest the dividends. From a total return perspective, combining high yield with slow and steady distribution growth will get you around the 10% return most expect from the broader market. And from a reliable and relatively safe investment. However, distribution will be key to assessing Enterprise’s appeal as an addition to your unique portfolio.

Should you invest $1,000 in Enterprise Products Partners right now?

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.

The Smartest High-Yield Energy Stock to Buy for $500 Right Now was originally published by The Motley Fool