Enterprise Products Partners: An Undervalued High-Yield MLP For An Overpriced Market

This is a guest contribution by Tom Hutchinson, Chief Analyst, Cabot Dividend Investor

The market just keeps on going. Both the S&P 500 and the Nasdaq made yet another new high this week.

The S&P is up 32.5% for the month so far. It’s also up more than 12% year-to-date, and 35% from the April low.

The economy is nowhere near recession. There are reasons to be optimistic. And the optimists have been right about the market for a long time.

But there’s a problem. Stocks are expensive. A common gauge of stock valuation measures stock prices relative to earnings, the price/earnings ratio.

The S&P 500 P/E ratio is now over 30. The historical average is around 15 or 16. In fact, the market P/E has been this high only one time in the past 100 years. That was during the dot.com bubble before the crash.

Of course, there are some justifications for the high P/E ratio. Artificial intelligence is providing the biggest earnings growth catalyst in a generation. And technology stocks now comprise a third of the S&P 500 index, a much higher percentage than ever before.

With current valuations elevated compared with historical averages, it’s a good time to consider high dividend stocks that pay hefty yields, whether the market is rising or declining.

With that in mind, Sure Dividend created a free list of over 200 high dividend stocks with dividend yields above 5%.

You can download your copy of the high dividend stocks list below:

S&P 500 P/E Ratio

Information Technology has been by far the best performing of the 11 S&P 500 stock sectors for a long time. The sector returned 176% over the last five years, compared to a 101% return for the S&P over the same period, which was only up that much because of technology.

The tech sector returned a staggering 732% over the last ten years, nearly three times the return of the overall market.

The price appreciation in already large technology companies has been unprecedented. Broadcom (AVGO) is up 659% over the last three years. Nvidia (NVDA) is up 1,331% over the same period. Oracle (ORCL) has doubled in price since May.

But unlike the dot.com era, it’s not just smoke and mirrors. The stocks rose because of soaring revenues. Sure, the stock price can’t be justified based on this year’s earnings.

The anticipated earnings over the next five or ten years do justify the current high prices. One could certainly argue that the historically high market PE is a natural consequence of the unprecedented earnings growth from AI.

Still, things have to go very well in the future to justify these prices. Maybe they will. But it’s tempting fate to price in perfection. I’ve lived a long time. My experience is that something always goes wrong eventually.

The market is high. Even the greatest bull markets sell off periodically. And a selloff seems overdue. It’s a good time to tone down expectations and focus on the part of the market that isn’t too expensive. There are some great buys out there that can provide solid returns away from the roller coaster.

The current situation calls for a certain kind of stock that can thrive in almost any market environment. If the market takes off, it can participate. If the market goes flat, it can generate positive returns. And if the market turns south, it can yield superior relative returns.

A good choice in this environment is midstream energy. These companies don’t rely on volatile commodity prices, but rather generate fees from the transport, storing, and processing of oil and gas. Demand should be resilient, especially for natural gas, and the high dividends provide a great buffer.

Historically, the better midstream energy stocks have provided a high income and a solid return throughout most market cycles. And that makes them ideal for the current unpredictable environment.

Things are changing. The environment for energy is undergoing a radical transformation that could make these stocks better than ever before.

Demand for natural gas is soaring in the U.S. and overseas. The demand is being driven by electricity. Natural gas is by far the number one source of electricity generation.

After being stagnant for decades, electricity demand growth is skyrocketing because of massive trends in artificial intelligence, electric vehicles, and an onshoring boom in manufacturing. Natural gas exports are also poised to rocket higher in the years ahead.

The current environment provides a huge runway for earnings growth that the historical stock performance doesn’t reflect.

Enterprise Product Partners L.P. (EPD)

Distribution Yield: 6.9%
Years of Consecutive Dividend Increases: 27

Enterprise Product Partners is one of the largest midstream energy companies and Master Limited Partnerships in the country, with a vast portfolio of service assets connected to the heart of American Energy Production.

It is connected to every major U.S. shale basin and 90% of American refiners east of the Rockies and offers export facilities in the Gulf of America.

Current assets include the following:

50,000 miles of pipeline
300 mmBbls of liquids storage
21 deepwater docks
45 natural gas processing trains
26 fractionators

As a midstream energy partnership, Enterprise is not reliant on volatile commodity prices because it generates about 80% of revenue from fees for storing, processing, and transporting oil and gas. They collect tolls on the U.S. energy highway at a time when production is likely to increase substantially.

The first thing that probably comes to mind when considering EPD is the distribution. EPD currently pays a $2.18 annual dividend, which translates to a 6.9% yield at the current price. Is that massive yield safe?

As an MLP, Enterprise pays no income tax at the corporate level and pays out the bulk of earnings in the form of distributions. The payout ratio has been in the 65% to 80% range over the past few years, which is lower than most MLPs and enables the partnership to invest its own capital in growth projects at lower cost.

EPD has performed very well over the last several years. Over the past three calendar years (2022, 2023, and 2024), EPD returned 78% with distributions reinvested compared to a return of just 28% for the S&P 500 over the same period. The MLP provided triple the market returns with just a fraction of the volatility.

Yet, despite the recent success, EPD still sells well below the 2014 high with much higher earnings and a P/E ratio of less than 12 times. It also has a beta of just 0.66, meaning it is a third less volatile than the overall market.

Enterprise is on the cusp of an earnings growth spurt. The partnership will have $6 billion in expansion projects coming online in the second half of this year. The new capacity should significantly expand cash flow and earnings in the next two quarters and well beyond.

Not only is Enterprise on the cusp of a huge pick-up in earnings growth, it’s also dirt cheap in an expensive market. EPD sells at a P/E ratio of less than 12. The distributions will continue to flow in any kind of market. And the price has also proven resilient among inflation, rising interest rates, and a slowing economy.

If you are interested in finding high-quality dividend growth stocks and/or other high-yield securities and income securities, the following Sure Dividend resources will be useful:

High-Yield Individual Security Research

Other Sure Dividend Resources