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Enterprise Products Partners LP (EPD) — which has joined our Income/Value Portfolio — stands out for its ability to grow dividends. The company is thriving from one of the major risks overhanging the market: rising oil and gas prices. During periods of far lower and declining fossil fuel prices, Enterprise managed to raise margins enough to offset revenue loss from the lower prices.

Roughly 75% of revenue comes from transporting and processing natural gas liquids (NGL) and natural gas. The remaining 25% comes from transporting and processing petroleum. NGLs are distinct from liquified natural gas (LNG).

The latter involves the liquification and compression of natural gas to allow it to be transported, usually by ship, to other countries. NGLs are products extracted from natural gas, such as ethane, propane, butane, and natural gasoline, and then further refined and transported.

Enterprise also transports natural gas from the point of production to destinations such as storage facilities. Its petroleum business is similar, encompassing both refining and transportation of the raw product and of products the company has refined.

The major reason margins can compensate for falling revenues is that prices of fossil fuels and of refined products aren’t highly correlated and indeed can be negatively correlated. That is, low fossil fuel prices can be associated with a peppier economy that leads to higher demand for refined products.

In the past five years, growth in the company’s earnings and dividends has been relatively modest, though still strong enough to produce double-digit returns given the high dividend.

With earnings likely to accelerate and free cash flow headed to 10% or more by mid-decade, we expect dividend growth to pick up. We view Enterprise Products as an exceptional total return vehicle — a highly defensive stock with a powerful offensive punch.

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