Is Plains All American Stock a Millionaire Maker?

Key Points

• Plains All American just announced a plan to slim down its midstream business.

• After selling off most of its natural gas liquid operations, the MLP will focus on oil.

• While oil remains important to the world, the trend is in a cleaner direction.

• 10 stocks we like better than Plains All American Pipeline ›

Midstream energy company Plains All American Pipeline (NASDAQ: PAA) has a lofty 8.3% distribution yield -- and that's likely to be the big draw for income-oriented investors.

However, there are a few wrinkles here that need to be considered before you hit the buy button on this high-yield stock, thinking it will make you a millionaire. A lower-yielding competitor might, in fact, end up being a better choice.

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Let's dive in and see why.

Plains All American changes gears

The big story for Plains All American right now is its deal to sell its natural gas liquids (NGL) business to Keyera for roughly $3.75 billion, leaving it with a largely crude oil-focused midstream operation. The logic here is sound, given that the NGL operations aren't as profitable as the crude business that will be left behind. Also, following the deal, the master limited partnership (MLP) will generate 85% of its cash flows from from more consistent fees, up from 80%, with the rest derived from commodity-linked revenue.

Image source: Getty Images.

So the business will be better positioned in some important ways. The transaction should also allow Plains All American to continue making bolt-on deals in the crude space. So it will be shrinking its business with the ultimate goal of growing it in areas that management believes are more attractive.

A large one-time distribution of around $0.35 per unit after the deal closes is also in the cards to help offset the tax impacts of the deal for unitholders , which some investors might appreciate, though this fact really doesn't speak to the long-term value of the business.

A lot of moving parts -- and not just because of the asset sale

So right now, there is a lot going on at Plains All American, noting that the sale isn't expected to close until early 2026. This means investors are in a state of limbo for a little while here. That said, there's more to consider.

PAA data by YCharts

For example, as the chart highlights, Plains All American's distribution has been growing pretty reliably for a couple of years. But before that, the distribution was anything but reliable. Given the fact that the NGL business still accounts for 15% of earnings before interest, taxes, depreciation, and amortization (EBITDA), it is entirely possible that another distribution cut might be in the cards. The business is, clearly, in a state of flux.

EPD data by YCharts

Now compare that to Enterprise Products Partners (NYSE: EPD), which has a yield of 6.9%. Enterprise's business is more heavily weighted toward natural gas, which is cleaner-burning than oil and coal. Natural gas is expected to be an important transition fuel as the world moves toward cleaner alternatives.

Essentially, Plains All American is betting on an older way of doing things, while Enterprise Products Partners is looking to the future. Note that Enterprise's distribution has headed steadily higher for 26 consecutive years.

Could Plains All American become a millionaire-maker investment? It is entirely possible, but investors are taking on extra risks to, maybe, achieve that end. Given that the yield is likely to be the big draw here, it seems like most income investors would be better off erring on the side of caution with a more consistent performer that isn't undertaking a major business overhaul. Enterprise Products Partners is a solid alternative.

Look past the yield, and think about the story

Plains All American's story isn't exactly a bad one. Crude oil is highly likely to remain important for decades to come, and bolt-on acquisitions can probably help keep the business growing for years.

However, if you are looking for a reliable income investment, it doesn't match up to a midstream peer like Enterprise Products Partners, which is also more aligned with the prevailing trends in the energy sector. Most income investors will likely be better off stepping down the yield spectrum for a business that appears to be more reliable.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.