Enbridge vs. Enterprise Products: Which High-Yield Dividend Is Actually Safer?
On metrics like dividend coverage and tax efficiency, Enterprise Products has the edge.
Enterprise Products Partners (EPD) and Enbridge (ENB) are two prominent pipeline stocks that have similar dividend yields, around 5.9% and 5.8% respectively. Both companies have a long history of raising their dividends annually, which makes it seem like they are quite similar at first glance. However, when looking beyond just yields, it becomes clear that Enterprise Products Partners is the safer investment for dividend-seeking investors.
One key difference is their dividend coverage ratios. Enterprise Products Partners has a cash flow from operations (CFFO) ratio of 54%, meaning it covers 54% of its distributions with its operational cash flow. On the other hand, Enbridge expects to use between 60% and 70% of its discretionary cash flow (DCF) for distributions, indicating a higher payout ratio and potentially less sustainable dividends.
Another important factor is debt levels. Enterprise Products Partners has a debt-to-EBITDA ratio of about 2.9, while Enbridge aims to keep its debt-to-EBITDA ratio between 4.5 and 5.0. A lower debt-to-EBITDA ratio means Enterprise has less financial risk and is in a better position to weather economic downturns.
Furthermore, although MLPs like Enterprise Products Partners have K-1s that can add tax complexity, Enbridge, being a corporation, pays dividends from after-tax earnings and is subject to U.S. withholding tax on dividends paid to non-resident investors. This makes Enterprise Products Partners potentially more tax-efficient for U.S. investors.
While Enbridge also operates as North America's largest natural gas utility, providing additional income streams, this diversification comes with less cash flow volatility compared to pure-play midstream stocks like Enterprise Products Partners. However, this advantage could be short-lived as Enbridge's financial metrics are not likely to drastically change from its previous quarter.
In summary, when considering dividend safety, durability, and tax efficiency, Enterprise Products Partners emerges as the stronger choice for income investors. However, it's essential to monitor Enterprise's debt levels and dividend coverage ratios closely, as any deterioration could make Enbridge the better option. For those seeking consistent dividend income, Enterprise Products Partners remains the preferred option.
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