Stop focusing on high-yielding companies and troubled businesses and start focusing on high-yielding growth companies.
One of the biggest temptations for dividend investors is reaching for yield. This basically means venturing into risky investments just to collect a bigger source of income. Err on the side of caution and you’ll be better off in the long run, especially if you have to live off the income you generate. That’s why Enterprise Products Partners (EPD 1.04%) is a high-yield investment you might want to buy. A quick comparison to Altria (MO -0.08%) shows why.
Who will win the high-profit story, Altria or Enterprise?
In terms of yield, Altria’s dividend yield of 8.1% is a full percentage point higher than Enterprise Products Partners’ dividend yield of 7.1%. Many investors are likely to choose the higher-yielding option, as both regularly increase their dividends. But that’s not always the best plan.
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Altria, a consumer staples company, has more risks than you might think, even though it operates in what is generally considered a reliable sector. This is because the main product is tobacco. This business has been in long-term decline for a long time. In the second quarter of 2024 alone, Altria’s cigarette sales volume was down 13% year-over-year. It’s no fluke. Volume decreased by 8.7% in the second quarter of 2023. In the same quarter of 2022, cigarette sales volume decreased by 11.1%. Any recent quarter, or even a recent full year, would have seen a similar terrible trend.
The company was able to offset the volume decline with higher prices and continue increasing its dividend despite the clearly dire direction of its most important business areas. Unless you can somehow stem the bleeding, you’ll very likely regret buying this high-dividend stock.
Enterprise is a completely different story.
The lower the company’s yield, the lower the risk.
Given that Enterprise operates in the highly volatile energy sector, you could easily argue that Enterprise comes with its own risks. The company’s midstream business is also directly tied to demand for oil and natural gas, which is being squeezed by the move toward cleaner alternatives. That makes sense, but what does Enterprise actually do?
As a midstream provider, Enterprise owns critical infrastructure assets that help transport oil and natural gas around the world. The price of energy is not as important as the demand for energy because there is usually a charge for using the infrastructure. Energy demand remains strong, regardless of oil and natural gas prices.
But here’s the big truth. Despite all the hype about clean energy, demand for oil and natural gas is expected to remain strong for decades to come. In fact, much dirtier coal will bear the brunt of the transition to clean energy, and demand for these fuels will likely increase.
In other words, Enterprise’s business is not as risky as it seems. In addition, the company is one of the largest midstream companies in North America with an investment-grade rated balance sheet. Although options for internal growth are limited, the company has served as an industry integrator for many years. For example, the company just announced plans to acquire Pinon Midstream for $950 million. Acquisitions are lumpy and unpredictable, but they allow Enterprise to extract slow and steady price increases from customers and give Enterprise plenty of room to grow.
EPD data by YCharts
If you want higher returns from a growing business, Enterprise is a better option when compared to Altria and its declining core business. Sure, you’ll be giving up a few percentage points in yield, but as Altria continues to struggle, buying Enterprise could help you sleep at night on that last point.
Enterprise yields still look cheap
Now comes the most interesting part. Enterprise’s dividend yield of 7.1% is higher than its 10-year average yield of 6.3%. So despite the recovery from the pandemic lows, it still appears to be undervalued. A growing business, a financially strong company, and an undervalued price all make Enterprise a high-yield stock you’ll regret missing out on. Especially when compared to other high-yield options that have similarly high yields but are far more risky.
