A high dividend yield can sometimes be a warning sign. Many companies with well-above-average payouts have had to cut their dividends at the first sign of financial trouble. Because of that, investors need to be careful when investing in a stock with a higher yield.
However, not all high-yield dividend stocks are at a high risk of a payout reduction. Enterprise Products Partners (NYSE: EPD) has proven the durability of its high-yielding payout (6.5%) over the years. The master limited partnership (MLP) has increased its distribution every year for more than a quarter century. That steady growth is very likely to continue. Because of that, the MLP is a very safe option for investors seeking a stable passive income stream.
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A cash-flow machine
Enterprise Products Partners generates lots of stable cash flow. The midstream company transports, processes, produces, stores, and exports a variety of hydrocarbons and related products via assets primarily backed by long-term, fee-based contracts and government-regulated rate structures.
Last year, the company produced a record $7.8 billion in distributable cash flow. That was enough money to cover its lucrative cash distribution to investors by a very comfortable 1.7 times. That allowed the MLP to retain $3.2 billion in cash, which helped fund expansion projects and maintain its strong balance sheet.
Enterprise Products Partners ended last year with a 3.1 times leverage ratio. That was well within its target range of 2.75 to 3.25. That low leverage ratio supports its strong investment-grade balance sheet. The MLP has the highest credit rating in the midstream sector at A-/A3.
The company's combination of very stable cash flow, strong coverage ratio, and low leverage level put its high-yielding distribution on an extremely firm foundation.
Lots of room to grow
Enterprise Products Partners increased its distribution by 5% last year, extending its growth streak to 26 years. It has already raised its payout this year, increasing it by 3.9% compared to its level at the end of 2023.
The company is in an excellent position to continue growing its cash flow and distribution in the future. Enterprise Products Partners spent $3.9 billion on growth capital projects last year and $949 million to acquire Pinon Midstream. It expects to invest another $4 billion to $4.5 billion into growth capital projects this year.
The company's heavy capital spending will fuel a growth spurt in 2025. Co-CEO Jim Teague noted in the MLP's earnings press release:
In 2025, $6 billion of major organic growth projects are expected to be completed and begin generating cash flow. These include two natural gas processing plants in the Permian Basin, our Bahia NGL pipeline, Fractionator 14, the first phase of our NGL export facility on the Neches River and expansions of our ethane and ethylene marine terminals on the Houston Ship Channel. This growth in cash flow will support future distribution increases and returns of capital.
Meanwhile, the company has more projects in the pipeline that are on track to enter service in 2026. It expects its capital spending will be about $2 billion to $2.5 billion next year to help finish off funding its Mentone West 2 processing plant, the second phase of its Neches River export facility, and its Enterprise Hydrocarbons Terminal.
Given the surge in projects on track to enter commercial service and start generating cash flow this year and the expected decline in capital spending in 2026, Enterprise Products Partners is about to reach an inflection point. The MLP will produce significantly more excess free cash flow over the course of next year. That should allow it to continue increasing its distribution, repay debt if desired, and repurchase more of its units.
Growing even safer
Enterprise Products Partners is a cash-producing machine. It uses a portion of that money to cover its high-yielding distribution with lots left over to fund expansion projects. With a huge expansion wave coming this year, and lower capital spending anticipated in 2026, the company's high-yielding distribution will grow even more sustainable. Because of that, it's an excellent option for investors seeking a very secure income stream (and are comfortable receiving the Schedule K-1 Federal Tax Forms the MLP sends its investors each year).
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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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
