Dividend-seeking investors are currently presented with two compelling investment options: United Parcel Service (UPS) and Enterprise Products Partners (EPD), both offering yields in the vicinity of 6.5% to 6.8%. While the high yields from each company are appealing at first glance, a closer examination of their business models, financial health, and dividend policies reveals significant differences that impact the risk and reward profiles for income investors.
Understanding United Parcel Service's Operations and Dividend Outlook
United Parcel Service, widely recognized as UPS, operates primarily as a package delivery service. Demand for its services experienced a surge during the coronavirus pandemic due to increased online shopping compelled by lockdowns and social distancing measures. However, following the worldwide reopening, demand normalized, prompting a sell-off in UPS shares amid concerns over future growth.
In response, UPS management initiated a strategic overhaul aimed at streamlining operations and concentrating efforts on the most profitable segments of its business. This restructuring is intended to position the company more competitively for the future. Despite the inherent uncertainty accompanying such a significant transformation, the share price decline has elevated the dividend yield to approximately 6.5%.
However, investors should note that UPS’s current dividend payout ratio exceeds 100% based on reported earnings, a situation that customarily signals potential dividend vulnerability. It is important to stress that dividends are paid from cash flow rather than earnings, which provides some cushion. Nonetheless, considering the ongoing business reset, it would not be unexpected for UPS’s board to modify the dividend arrangement, possibly resulting in a dividend reduction. This introduces a level of uncertainty for dividend-focused investors considering UPS as a reliable income source.
Enterprise Products Partners and Its Midstream Energy Business
Enterprise Products Partners operates in the midstream energy sector, focusing on owning and managing energy infrastructure assets including pipelines. Its revenue primarily derives from fees charged to customers for transporting commodities such as oil and natural gas through these assets. Crucially, the price fluctuations of these commodities have less impact on the company’s revenues than the volume transported, which tends to remain steady due to the consistent global demand for energy.
One of Enterprise’s distinguishing features is its longevity of reliable distribution increases, highlighted by a streak of 27 consecutive years of annual growth since becoming a publicly traded entity. This consistency underscores the company’s emphasis on dependable income distribution.
Currently, Enterprise Products Partners offers a distribution yield of approximately 6.8%. This yield level partly stems from its organizational structure as a master limited partnership (MLP), which facilitates tax-advantaged income distribution to unitholders. The MLP setup requires investors to manage additional tax documentation annually, including a K-1 form, which is a consideration for some investors.
Compared to the inherently volatile energy sector, Enterprise’s midstream focus represents one of the more stable subsegments. Its distributable cash flow comfortably covers distributions by a factor of 1.7, demonstrating robust coverage. Coupled with an investment-grade balance sheet, this strong financial footing significantly reduces the risk of distribution cuts and positions Enterprise for continued incremental distribution increases in future years.
Weighing the Options: Dividend Reliability and Growth Prospects
For investors prioritizing income reliability, Enterprise Products Partners presents a more straightforward and dependable choice. Its business model promotes steady cash flows and a history of consistent distribution growth, with a sustainable payout supported by strong cash flow coverage and solid credit ratings.
Conversely, while UPS’s dividend yield is only slightly lower, its elevated payout ratio and ongoing comprehensive operational overhaul increase the risk of dividend adjustments. While there may be considerable capital appreciation potential if UPS's turnaround succeeds, the associated uncertainty and potential for dividend reset may dissuade investors focused primarily on stable income streams.
Ultimately, dividend investors seeking to maximize portfolio income with a preference for stability are more likely to find Enterprise Products Partners aligns with their objectives. The company’s status quo approach and long-standing track record of distribution growth underscore its appeal as a reliable income generator in comparison to UPS.