Pipeline companies can be excellent long-term investments. These entities generate relatively predictable cash flow because long-term, fee-based contracts back their assets, which gives them money to pay lucrative dividends as well as to build and buy additional assets that grow their cash flow streams. That growth, when compounded over the long term, can fuel fantastic total returns for investors.
Two pipeline stocks that have been powerful wealth creators for long-term investors are Enbridge (NYSE: ENB) and Enterprise Products Partners (NYSE: EPD). For example, those who invested in Enterprise when it came public nearly 20 years ago could have turned a $3,000 investment into $39,000 if they reinvested their distributions along the way, while those who bought Enbridge around that same time could have done even better.
Making a mint by dominating this niche
Enterprise Products Partners formed in 1968 as a wholesale marketer of natural gas liquids (NGLs) such as propane. The company would spend the next 30 years quietly expanding within that niche using private capital. However, in 1998 it went public by selling 12 million units at $22 apiece to fund project developments and future acquisitions. Investors who bought at around that IPO price have been richly rewarded by the company's performance as it continued to expand within its NGL niche, where it's currently the dominant player. Those who bought and held have seen units appreciate 365% in value, making a $3,000 initial investment in Enterprise Products Partners worth nearly $11,000 today. Meanwhile, investors who chose to reinvest their quarterly distributions have earned even better returns, as their initial investment would be worth a jaw-dropping $39,000 (give or take commissions and other frictional costs).
One key to those impressive gains is the fact that Enterprise Products Partners has increased its quarterly distribution to investors 61 times since going public, including in each of the last 52 consecutive quarters. Meanwhile, there's more distribution growth in the forecast, as the company has $9 billion of expansion projects under construction that should steadily increase its fee-based cash flow through the end of the decade. Given those visible growth prospects, investors who buy today have the potential to earn wealth-changing gains by snapping up the company's generous 6.7% distribution and then reinvesting that growing earnings stream into more units so that the wonder of compounding can work its magic.
This income lover's dream stock lives just north of the border
Canadian oil pipeline giant Enbridge has delivered similarly robust returns to its investors over the past two decades. Overall, the stock has risen nearly 780% while producing a total return of almost 1,600%, which would have turned a $3,000 investment into $23,375 and $48,000, respectively, for investors who held over those two decades. Fueling that growth is the company's rapidly increasing dividend, which has risen by an 11.2% compound annual growth rate during the past 20 years thanks to Enbridge's focus on expanding its portfolio of low-risk energy infrastructure assets that generate predictable cash flow streams.
That said, Enbridge still has plenty of growth left in the tank given that it has 31 billion Canadian dollars ($24.7 billion) of growth projects underway and another CA$48 billion ($38.2 billion) in development. The company expects these projects to fuel 10% to 12% compound annual dividend growth all the way through 2024. That growing income stream should continue creating value for long-term investors, especially those who reinvest it into more shares of this high-yield Canadian pipeline giant.
A low-risk way to create wealth
Pipeline companies tend to be lower-risk investments since long-term, fee-based contracts underpin their assets. However, those contracts provide these companies with a steady stream of cash flow that they can use to compound wealth for investors over the long term. While Enbridge and Enterprise have already created tremendous value for their investors, both should continue doing so given the strength of their businesses and the growth projects they already have underway.
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Matt DiLallo owns shares of Enterprise Products Partners. The Motley Fool owns shares of and recommends Enbridge. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.