3 Pipeline Stocks to Buy in April

Key Points

Enterprise Products Partners has a great distribution record and a high yield.

Enbridge has an impressive dividend streak, an attractive yield, and offers unique diversification.

Energy Transfer has a high yield, and management appears focused on turning the partnership into a more reliable income investment.

• 10 stocks we like better than Energy Transfer ›

Oil and natural gas are volatile, which generally makes energy stocks highly volatile as well. From a big picture perspective, the energy sector is a tough one for dividend investors, unless they dig in and learn about the midstream segment of the industry. Here's why even conservative dividend investors may find Enterprise Product Partners (NYSE: EPD), Enbridge (NYSE: ENB), and Energy Transfer Partners (NYSE: ET) attractive high-yield energy opportunities in April.

What do midstream businesses do?

Upstream companies produce oil and natural gas. Downstream companies (chemical makers and refiners) take those commodities and process them into other products. Both of these segments of the broader energy sector are commodity-driven and volatile. Midstream companies are different.

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Midstream companies own energy infrastructure, such as pipelines, that help to move oil and natural gas around the world. These businesses generally charge fees for the use of their assets. This means that the volume flowing through their systems is more important than the price of the commodities they are moving. Given the importance of oil and natural gas to the world economy, volumes tend to be resilient regardless of commodity prices and economic conditions.

That said, midstream businesses generally grow very slowly. And the dividends you collect will likely make up the lion's share of your return over time. But if you are a long-term dividend investor trying to maximize your income, that probably won't be a big concern. Normally, midstream businesses only run into problems if they overleverage themselves (more on this below).

Two reliable pipeline stocks and one that could be worth the risk

If you are a conservative income investor, the first pipeline owner you should look at is Enterprise. It has an attractive 5.7% yield, and the distribution has been increased annually for 27 consecutive years. That's basically as long as this master limited partnership (MLP) has been publicly traded. Add in an investment-grade rated balance sheet and distributable cash flows that cover the distribution 1.7x over, and there's very little risk that Enterprise won't continue to pay you for years to come. In fact, it seems far more likely that the distribution will continue to increase regularly.

Enbridge's 5.4% yield is attractive, too, but there are some additional nuances to consider. This Canadian energy giant's business foundation is oil and natural gas pipelines. However, it also owns regulated natural gas utilities and renewable power assets. It is financially strong and has increased its dividend annually for 31 years, so it can stand toe-to-toe with Enterprise in many ways. But it isn't a pure-play pipeline company. Highly conservative investors might like the added diversification, while others might decide that Enterprise's midstream focus and higher yield win the day.

Energy Transfer and its lofty 6.9% yield are only appropriate for more aggressive investors. This midstream MLP leaned too hard on its balance sheet. It cut its distribution in half in 2020 to reduce leverage. Having done that, the distribution is growing again, but the annual streak is only a few years long.

That said, management now appears to be taking a slow-and-steady approach to growth. The goal is for distribution growth of 3% to 5% a year, which is entirely reasonable and looks like it could be supported by internal growth opportunities. This marks a big change from Energy Transfer's past, where growth was heavily driven by debt-funded acquisitions. Given that this business shift is still fairly recent, the MLP remains most appropriate for aggressive investors.

Big yields backed by reliable businesses

At the end of the day, charging fees for moving oil and natural gas makes for a pretty boring business. However, that's exactly why Enterprise, Enbridge, and Energy Transfer can support such high yields. And why they sidestep the commodity risk that makes other energy stocks so risky. If you are looking for a pipeline stock as April winds down, one of these three high-yielders should fit the bill.

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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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.