If you’re looking for some high-yield stock you can hold for a long time, say, like 20 years, look no further than the energy midstream space. I’ve held shares (technically units) of both Energy Transfer (NYSE: ET) and Enterprise Products Partners (NYSE: EPD) for more than a decade, and I can see holding them for another 20 years.
Both are midstream companies structured as master limited partnerships (MLPs). While this comes with a little added paperwork come tax time, MLPs have the added advantage that much of their distributions are treated as return of capital and are thus tax-deferred until you sell the units. So instead of paying taxes on the distribution, they reduce your cost basis. MLPs are pass-through entities that aren’t taxed at the corporate level, so they generally pay handsome distributions that they continually look to increase. Meanwhile, the pipeline businesses that are the core of their operations act as energy toll roads and generate very steady, visible cash flow. This, along with the preferred tax treatment, makes them great stocks to own for the very long haul.
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Let’s dig deeper into why Energy Transfer and Enterprise are two of my favorite midstream MLPs.
Energy Transfer operates one of the largest and most diversified midstream operations in North America. The company is well-positioned in the Permian Basin, the most prolific oil basin in the U.S., and home to some of the lowest-cost natural gas. With natural gas demand booming as energy needs increase, especially with the rise of artificial intelligence (AI), Energy Transfer has seen its growth project backlog swell.
Two of the company’s biggest projects are transporting natural gas from the Permian to high-demand areas. One pipeline will head west and serve the Arizona and New Mexico markets, while the other will traverse Texas to support the state’s growth in AI data centers and energy needs. It also has several projects directly with data center operators, as well as with the utilities that serve them.
Energy Transfer is in growth mode, but it also carries a robust 7.2% yield with plans to grow its distribution at a 3% to 5% clip annually. Its balance sheet is in some of the best shape it’s been in during its history, and it has a high distribution coverage ratio (1.8x last quarter). Meanwhile, the stock is cheap both historically and compared to peers, trading at a forward enterprise value-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) multiple (the most common way to value pipeline stocks) of just 8.6 times. To put that in perspective, the average pipeline MLP traded at a 13.7x multiple between 2011 and 2016.