Enterprise Products Partners (EPD -0.52%) continues to be an income-generating machine for its investors. The master limited partnership (MLP) recently declared its latest distribution payment. It’s paying $0.545 per unit ($2.18 annualized), up from $0.535 last quarter ($2.14 annualized).
This hike continues the steady upward trend in the distribution, which has increased for 26 consecutive years. At its recent unit price, the midstream giant’s distribution yield is approaching 7%.
The MLP should have plenty of fuel to continue increasing its payout in the coming years. That makes it an excellent option for those seeking to generate passive income, as long as they’re comfortable receiving the Schedule K-1 Federal Tax Form that the MLP sends to investors each year.
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The raises keep coming
Enterprise Products Partners is hiking its distribution payment by 1.9%, compared to the first quarter, putting it 3.8% above the year-ago payment level. That continues its long history of distribution increases, which is now well into its 26th straight year.
The MLP can easily afford this higher distribution level. The pipeline company generated $2 billion in distributable cash flow during the first quarter, representing a 5% increase from the year-ago level. That was enough cash to cover its quarterly payment by a super comfy 1.7 times.
As a result, Enterprise Products Partners retained $842 million in excess free cash flow in the period. It returned an additional $60 million of that money to shareholders via unit repurchases and reinvested the rest into growing its operations.
Enterprise Products Partners’ conservative payout ratio has enabled it to maintain a strong balance sheet. The MLP ended the first quarter with a low 3.1 times leverage ratio. This level supports the strongest balance sheet in the midstream industry, as Enterprise has A-rated credit (A-/A3).
Ample fuel to continue growing its payout
Enterprise Products Partners has grown its payout by expanding its integrated midstream network. It still has a lot of growth ahead.
The midstream company had $7.6 billion of major growth projects in its backlog at the end of the first quarter. The bulk of those projects ($6 billion) are on track to come online by the end of this year, including two more gas processing plants and some additional export capacity. The remaining projects (another gas processing plant and additional export capacity additions) should enter commercial service by the end of 2026.
As a result, the company’s free cash flow is on track to surge. In addition to the increased cash flow from its new projects, the company’s capital spending is on track to decline from a range of $4 billion-$4.5 billion this year to $2 billion-$2.5 billion in 2026.
The incremental free cash flow will provide Enterprise Products Partners with the flexibility to return more money to investors through distribution increases and unit repurchases. The MLP can also make additional growth investments (organic expansions and acquisitions).
The company has several more expansion projects under development, including additional gas processing capacity. Enterprise also has a long history of making accretive deals that enhance its growth and profitability.
For example, last year, it bought Pinon Midstream for $950 million. The company expected the deal to add $0.03 per unit to its distributable cash flow this year. Additionally, it came with built-in opportunities to expand Pinon’s treating capacity, which would also enable Enterprise to expand its gas processing capacity.
A top choice for a steadily rising passive-income stream
Enterprise Products Partners pays a high-yielding distribution backed by a rock-solid financial profile. It has an exceptional record of increasing its payout, which should continue in the coming years. These factors make the MLP a compelling investment option for those seeking to generate stable and growing passive income.
Matt DiLallo has positions in Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.