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Here's why Enterprise Products Partners is a no-brainer dividend stock

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Investors should consider many factors when considering a dividend-paying stock. Yield is frankly only a small piece of the puzzle, though many on Wall Street are quickly becoming enamored with big dividend payouts. That said, Enterprise Product Partners(EPD -0.41%) the mammoth 7.9% yield not only looks sustainable, but the underlying distribution supporting it also looks likely to grow. Here’s what you need to know, in charts and graphs.

A long history of growth

Enterprise Products Partners is a master limited partnership (MLP), a complex business structure in some ways, but specifically designed to pass income through to unitholders. So the big yield makes sense. Nonetheless, it’s important to note that Enterprise has demonstrated an incredible commitment to distribution over time, with 24 consecutive years of distribution growth, with a quarterly dividend now of $0.475.

EPD Dividend Table

EPD dividend; given by YCharts.

Distributions are clearly a key objective, and this should give investors a bit more confidence in the revenue stream generated by the company. That said, it’s also worth noting that there’s a huge amount of internal ownership here, at around 33%.

Last name

Title

Ownership Percentage

Randa Duncan Williams

Director and Chairman of the Board

32.3%

All other administrators

0.3%

Total Insider Ownership

32.6%

Data Source: October 2022 Enterprise Product Partner Proxy Statement

Insider ownership is largely tied to one person. While there are negatives on the control side of the equation in a situation like this, a reduction in distribution would also mean a huge drop in income for the chairman of the board. Thus, income investors can be reassured that the board is closely aligned with their interests regarding the sanctity of the distribution.

A strong balance sheet and coverage

Simply having a board that is committed to supporting distribution is not always enough. A strong balance sheet and reasonable payments are also important. Enterprise Products Partners also stands out on each of these points.

For example, MLP’s financial debt-to-earnings before interest, tax, depreciation, and amortization (EBITDA) ratio is, and has long been, down compared to its peers.

Chart of EPD financial debt to EBITDA (TTM)

Financial debt EPD on EBITDA (TTM); given by YCharts. TTM = last 12 months.

In terms of distribution coverage, Enterprise’s coverage rate in the third quarter was 1.8. This leaves plenty of room for adversity before the cast is threatened. Notably, distribution coverage has increased in recent years, which means payment security is improving over time.

Year

2017

2018

2019

2020

2021

2022 (9 months)

Distribution coverage rate

1.2

1.5

1.7

1.6

1.7

1.8

Data Source: Enterprise Product Partners.

Some of the trend above was intentional. Enterprise sought to further self-finance its own growth. This avoids having to resort to additional leverage or issue units which could end up diluting current unitholders. Both are good things. And with such strong coverage, it seems very likely that the historic upward trend in distribution growth will continue without too much trouble.

Attractive for all types

Given the size of the distribution and the financial strength behind it, income investors across the risk spectrum should feel comfortable with Enterprise’s distribution. That said, the distribution growth here is sub-single digit over time, so the big yield will make up the vast majority of your total return. But if the goal is to maximize your passive income stream, this MLP should be on your shortlist.

Reuben Gregg Brewer holds positions at Enbridge. The Motley Fool fills positions and recommends Enbridge and Kinder Morgan. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.

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