In a few years, you’ll wish you had bought this undervalued high-yield stock

One of the biggest temptations for dividend investors is to look for yield. Basically, this means taking on risky investments just to collect a larger stream of income. You’ll be better off in the long run if you err on the side of caution, especially if you have to live off the income you generate. That’s why Enterprise product partners (EPD 1.04%) it’s a high-yield investment you wish you had bought. A quick comparison with Altria (MO -0.08%) will help explain why.

Who is winning the high yield story, Altria or Enterprise?

When it comes to yield, Altria’s dividend yield of 8.1% is a full percentage point higher than Enterprise Products Partners’ distribution yield of 7.1%. Both have increased their dividends regularly, so many investors may want to take the higher-yielding option. But that’s not necessarily the best plan.

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Altria, a consumer staples company, has more risks than you might think, despite operating in what is generally considered a trusted sector. That’s because its main product is cigarettes. This business has been in secular decline for a long time. In the second quarter of 2024 alone, Altria’s cigarette volume fell 13% year over year. It’s not a coincidence. In the second quarter of 2023, volumes fell by 8.7%. In the same quarter of 2022, the volume of cigarettes fell by 11.1%. Any recent quarter and any recent full year would have shown the same dire trend.

The company has offset volume declines with price increases, which has allowed it to continue growing its dividend despite the clearly dire direction of its most important business line. There’s a very real chance you’ll regret buying this high-yielding dividend stock if it can’t stop the bleeding somehow.

Enterprise is a whole other story.

Lower enterprise returns come with lower risk

You could easily argue that Enterprise comes with its own risks given that it operates in the highly volatile energy sector. And its midstream business is directly tied to demand for oil and natural gas, which is being squeezed by the move to cleaner alternatives. Fair enough, but what does the Enterprise actually do?

As a midstream provider, Enterprise owns vital infrastructure assets that help move oil and natural gas around the world. It generally charges for the use of its infrastructure, so the price of energy is less important than the demand for energy. Energy demand tends to remain robust regardless of oil and natural gas prices.

But here’s the big fact — despite all the hype around clean energy, demand for oil and natural gas is expected to remain robust for decades to come. In fact, demand will likely increase for these fuels, with much dirtier coal bearing the brunt of the clean energy shift.

In other words, the Enterprise business is not as risky as it might seem. In addition, it is one of the largest midstream players in North America with an investment-grade balance sheet. Although domestic growth options are limited, it has long acted as an industry consolidator. It just announced plans to buy Pinon Midstream for $950 million, for example. The acquisitions are murky and unpredictable, but they give the company ample room for growth in addition to the slow and steady price increases it will be able to extract from customers.

EPD data by YCharts

If you want high yield from a growing business, Enterprise is the better option compared to Altria and its declining core business. Sure, you’ll give up a percentage point in yield, but as Altria continues to struggle, that last point will let you sleep at night if you buy Enterprise.

Enterprise performance still looks cheap

Here’s the most interesting part: Enterprise’s dividend yield of 7.1% is above the 10-year average yield of 6.3%. So despite the rebound from pandemic lows, it still appears to be undervalued. A growing business, a financially strong company, and an undervalued price make Enterprise a high-yielding stock you’ll regret missing out on. Especially when you compare it to other high yield options with equally high returns but much riskier.