The Motley Fool: Energy is out of favor, but promising

The energy industry is going through some tough times, with oil and natural gas prices depressed. Midstream energy services specialist Enterprise Products Partners (NYSE: EPD) has been performing relatively well anyway, though, and seems poised for further growth.

As one of the nation’s largest transporters, processors and exporters of natural gas liquids, the company benefits from its large scale. While low oil and gas prices can hurt profitability, they have kept demand up, which is good for Enterprise’s pipeline, processing and storage businesses.

Enterprise Products has a master limited partnership (MLP) structure and a conservative management team that focuses on measured, sustainable growth, instead of how fast it can grow its payout. This approach means it consistently reinvests in high-return projects and doesn’t rely as much on issuing bonds or stock to meet its capital needs, as many of its peers do.

(Note that MLPs have special tax considerations and aren’t ideal for tax-advantaged accounts such as IRAs and 401(k)s. They can serve you well in regular investment accounts.)

Enterprise generates billions in operating cash flow annually and has a proven track record of stable, rising payouts to its shareholders. Its most recent dividend increase was its 46th consecutive quarterly hike and represented a 5 percent increase over year-earlier levels. The stock recently yielded a hefty 6.4 percent. (The Motley Fool has recommended Enterprise Products Partners.)

Ask the Fool

Q: Can you explain how Fitbit only raised $732 million when it went public last year, when the company was valued at about $4.1 billion? Shouldn’t it have raised $4.1 billion? - K.S., Madison, Indiana

A: It would raise $4.1 billion only if it sold all of itself to the public. Instead, it sold about 18 percent of its shares. The company issued about 36.6 million shares in its initial public offering (IPO), when there were roughly 205 million shares in existence.

With IPOs, it’s typical that the owners of a company sell just a portion of it to the public, retaining at least a majority of shares, if not much more.

Q: What’s a UIT? - H.M., Jacksonville, North Carolina

A: Unit investment trusts, or UITs, can look like mutual funds, but they’re quite different. They’re invested in a relatively fixed portfolio of securities (such as, say, 12 stocks or bonds), with no investment manager regularly buying and selling holdings.

A UIT’s components are held until its termination date, which could be many years away. Investors who want to trade shares (or “units”) of a UIT before it matures can often do so on the secondary market - but unlike a mutual fund, UIT share prices in the secondary market may be priced above or below the net asset value of the trust’s actual holdings.

When you buy shares of UITs, you may pay a significant sales fee, or load, but the ongoing management fees tend to be low. Many mutual funds, in contrast, charge no sales load at all, but can charge more in annual fees. Some exchange-traded funds (ETFs) are technically UITs. Learn more before investing in UITs, such as at sec.gov/answers/uit.htm.

My dumbest investment

In my desire not to miss the Next Big Thing, I invested in two penny stocks based on some propaganda I had received. Both have declined even deeper into penny stock territory. I didn’t invest a lot of money, but they still have been a drag on my portfolio. I have learned to stick to what I know and ignore the hype. - D.R., online

The Fool responds: You learned a valuable lesson, as penny stocks are notoriously risky, and you’re lucky that you didn’t invest a lot of money in them. Penny stocks — those trading for less than about $5 per share - usually belong to small and unproven companies, and they tend to be easily manipulated.

Since penny stocks tend to have relatively few shares outstanding, it may not take much buying or selling to send the share price up or down significantly. Thus, dastardly types will engage in “pump-and-dump” schemes, hyping the companies online or in newsletters so that naive folks buy the shares, sending them up. Then the hypers will sell for a profit, with their selling sending the shares hurtling back down.

You’re smart to now see the propaganda for what it is - mere hype. It’s easy to get excited about companies that might be on the verge of curing cancer or striking oil, but note that many are still unprofitable, often even without revenue.