Investors have been taught to cheer bull markets and fear bear markets, but the fact is they both happen, and there’s little you can do to avoid the normal up/down cycle of the market. A better bet than living in fear of a bear goring is to find investments that will be resilient to downturns. Enterprise Product Partners (EPD -0.46%) and Enbridge (ENB -0.71%) are two such investments in the energy sector.
The basic model
What’s so special about Enterprise and Enbridge is that they operate in the midstream segment of the energy sector. They own physical infrastructure like pipelines, storage, processing, and transportation assets. To simplify things a bit, they help to move oil, natural gas, and the products into which these fuels get turned, from where they are produced to where they ultimately get consumed. The key to the story is that both use a toll-taker model, charging fees for the use of their vital and difficult-to-replace assets.
This means that demand for energy is far more important than the price of the commodities flowing through their systems. A bear market has virtually nothing to do with energy demand. Even during recessions, energy demand generally only falls slightly. So the cash flow generated by the vital infrastructure Enterprise and Enbridge own is fairly resilient. That’s the first reason to like these midstream players even in the face of a bear market.
But there’s more to the story, because they both have generous yields. Master limited partnership (MLP) Enterprise has a distribution yield of 7.5%. Enbridge’s dividend yield is 6.4%. Enterprise’s distribution has increased its distribution each year for 24 consecutive years, while Enbridge has increased its dividend annually for 28 years. Both streaks survived the bear markets of the Great Recession, the 2000 tech crash, and the swift drop in 2020 related to the coronavirus pandemic.
If you are comfortable that you can count on Enterprise and Enbridge to keep paying you well even during a bear market, then the next question is, which one is better?
That’s not an easy answer. For starters, Enterprise is an MLP, a business structure that comes with some tax complexities and advantages. You’ll want to consult a tax pro to understand how it might fit into your portfolio, but know going in that MLPs don’t play nicely with tax-advantaged retirement accounts. Enbridge uses a traditional corporate structure, but it is Canadian, so U.S. investors will have to pay Canadian taxes (which can be claimed back when you file your U.S. taxes), and the value of the dividend will fluctuate with exchange rates.
Above these entity structure issues, Enterprise is tightly focused on the old guard energy sector. In fact, management is still very positive on the long-term future of oil and natural gas, so it sees little reason to shift its approach. Enbridge, on the other hand, is taking a more moderate approach. It still generates the vast majority of its cash flow from oil and natural gas pipelines and a natural gas utility business. However, it is starting to build out a clean energy division (about 4% of earnings before interest, taxes, depreciation, and amortization (EBITDA) today) as it looks to adjust along with the world as the clean energy transition takes shape. Right now it is starting to bring a string of European offshore wind farms online.
In the end, neither is likely to be a fast-growing business. But both are likely to be slow and steady income stocks no matter what is going on in the market and, for the most part, even within the energy sector itself. And that’s the point! These are boring income stocks that you can comfortably own in good markets and bad.
If you are a dividend investor, you’ll like the simplicity of the midstream businesses behind both Enterprise and Enbridge. If there’s one knock against either, it is that the global push toward clean energy is likely to limit long-term growth opportunities in the oil and gas space. That’s true, but Enterprise believes that an all-of-the-above energy model will give it ample room to keep paying investors well. Meanwhile, Enbridge is slowly building its clean energy footprint, so, eventually, it will be in lockstep with the broader world’s needs. Both should keep paying out a hefty income stream for years to come.
Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.