Norfolk Southern Corp. (NSC), Waste Management, Inc. (WM): Three Natural Monopolies for Dividend Investors

While the trash collection business provides recurrent and stable cash flows, extracting value from post collection volumes by selling it as energy and raw materials can create some exciting growth opportunities in the middle term while at the same time increasing profitability. If that weren’t enough, Waste Management pays a big fat dividend yield of 4%.

A Pipeline of Dividends

Enterprise Products Partners L.P. (NYSE:EPD) is the biggest listed master limited partnership in the U.S. The company transports and processes natural gas, natural gas liquids, crude oil, refined products and petrochemicals. It has a unique and integrated asset base across the midstream value chain: Enterprise Products Partners L.P. (NYSE:EPD) gathers natural gas from wellheads from the Rockies to the offshore Gulf of Mexico, it operates gas processing plants, transports both natural gas and NGLs, provides storage and fractionation for NGLs, and markets natural gas and NGLs to the petrochemical industry.

Competitors would hardly choose to replicate such an enormous and strategic asset base. Instead, different players in this industry usually work together via joint ventures and complementary projects. The company is in the process of developing a new 270-mile pipeline header system that will deliver ethane to petrochemical plants in the U.S. Gulf Coast region, and it’s in a privileged position to benefit from increasing demand for natural gas liquids over the next years.

Master limited partnerships don’t pay taxes at the corporate level, and this lowers their cost of capital in comparison to their incorporated peers. Another implication of this partnership structure is that companies are required to pay distributions in relationship to their distributable cash flows, a similar concept to free cash flows. In Enterprise Products Partners L.P. (NYSE:EPD)’s case, this means a dividend yield of 4.6% at current prices.

Bottom Line

Natural monopolies are a very special kind of business, and they provide a remarkably robust and durable source of competitive advantage. These three companies combine the fundamental qualities of natural monopolies with rock solid dividend payments, and this makes them attractive opportunities for investors in the hunt for unusually solid dividend plays.

The article Three Natural Monopolies for Dividend Investors originally appeared on Fool.com and is written by Andrés Cardenal.

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