The Smartest High-Yield Midstream Stocks to Buy With $100 Right Now

Ideally, income seeking investors want to receive the maximum amount of dividends for the price they pay for one share of a dividend paying business. In investing parlance, this means seeking out stocks with higher dividend, or distribution, yields, or higher forward 12-month dividends per share for the current price of one share.

However, should higher yields alone drive your investment decisions?

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Thanks to how they are structured, energy pipeline, or midstream, companies are among the highest returners of cash. Energy Transfer (NYSE: ET) is offering investors a lofty 6.9% distribution yield right now, and you can get in the door for much less than $100 a share. That's better than the 6.3% on offer from Enterprise Products Partners (NYSE: EPD) or the 5.9% dividend yield from Enbridge (NYSE: ENB).

But before you just buy the highest-yielding midstream option, you'll want to take a look at why Enterprise and Enbridge are worth a slight trade-down on the income front.

The problem with Energy Transfer as an income stock

In 2020, during the coronavirus pandemic, Energy Transfer cut its dividend distribution by 50%. Given the uncertainty at the time, and the massive plunge in energy prices, that decision probably made a lot of sense for Energy Transfer. However, if you were trying to live off of the dividends your portfolio generated, that cut would have been highly unwelcome.

Basically, right when you most wanted consistency in your income stream, you didn't get it from Energy Transfer. If dividend consistency is important to you, well, you probably don't want to have this midstream master limited partnership (MLP) in your portfolio. The counter-argument here is that the distribution is growing again and is now higher than it was prior to the cut. But that's cold comfort to a unitholder that had to find a way to make up for an income shortfall when the world was, effectively, shut down.

Enterprise and Enbridge keep paying in good markets and bad

That 2020 distribution cut is in sharp contrast to the increases that were made by both Enterprise Products Partners and Enbridge. Like Energy Transfer, investors can buy into each of these North American midstream giants for much less than $100. But unlike Energy Transfer, income-focused investors don't have to worry nearly as much about the safety of the income they'll collect from these investments.

But 2020 wasn't an unusual year for either Enterprise or Enbridge. It was just another year in a long string of years in which investors benefited from a growing income stream. Enterprise has increased its distribution for 26 consecutive years. Enbridge has increased its dividend, in Canadian dollars, for 30 consecutive years.

What's interesting is that all three of these midstream businesses do roughly the same thing. They charge fees for the use of the energy assets they own, helping to move oil and natural gas around the world. Since energy demand is consistently high regardless of oil and gas prices, midstream firms are usually reliable generators of cash flow. For better or worse, however, Energy Transfer's distribution cut proves it isn't as reliable as Enterprise or Enbridge when it comes to returning that cash flow to investors.

That said, investors should go in understanding that the yields on offer here will likely represent the lion's share of their total return. Although it is highly likely that the income stream generated by Enterprise and Enbridge will continue to grow, that growth will probably be in the low to mid-single digits over time. That will maintain the buying power of the income you generate, and maybe grow it a little, but that's about all that should be expected. However, if you are looking to live off of the dividends your portfolio generates, that probably won't upset you.

Don't just buy the highest yield

Energy Transfer isn't a bad business, per se, but it clearly didn't put investors first in 2020. However, Enterprise and Enbridge prioritized their investors. Add in their still-lofty yields and strong finances (both have investment-grade-rated balance sheets), and they have proven to be better options for income in the midstream space, assuming you don't want to suffer through a large and surprising distribution cut.

Should you invest $1,000 in Energy Transfer right now?

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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.