Energy Transfer (ET 1.97%) accomplished an important goal earlier this year: The master limited partnership (MLP) delivered on its promise to return its distribution to its pre-pandemic peak. However, it's not stopping there.

The leading energy midstream company is giving its investors another raise. It expects to continue growing its distribution, which yields an eye-popping 9.6%, for the foreseeable future. That makes it a compelling option for investors seeking a big-time passive-income stream.

Delivering and then some

Like many companies, Energy Transfer had to reduce cash outflows during the pandemic due to the impact on its operations. The company slashed its distribution to investors by 50% in 2020 to conserve cash and solidify its balance sheet. The midstream company planned to return its distribution payment to its pre-pandemic level once it achieved its leverage ratio target of 4x to 4.5x its debt-to-adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). 

The company achieved that deleveraging goal last year. That allowed it to steadily bring the distribution back to its former peak. It increased the payout by 75% last year, including 15% in January. 

Energy Transfer isn't stopping there. It recently declared its first-quarter payment at $0.0375 per unit. That's a modest 0.8% increase from the fourth-quarter's level of $0.305 per unit.

In addition, the MLP now expects to increase its distribution by $0.0025 per unit each quarter ($0.01 annualized). That gives it a target of growing the payout by about 3% to 5% per year. It's a decent growth rate, especially for a company that offers such a high-yielding payout. 

The fuel to deliver steady growth

Energy Transfer is in a solid position to deliver on its new distribution growth target. The company's large-scale and diversified midstream operations generate lots of stable cash flow.

Last year, the MLP produced $7.4 billion of distributable cash flow, which exceeded its distribution payments by $4.4 billion. That allowed the company to retain cash to fund growth-related investments and strengthen its balance sheet.

While it will produce less excess cash after paying the distribution this year, given its higher rate, it also doesn't need as much money. It has already achieved its leverage target. Meanwhile, its growth-focused capital spending will fall from $1.93 billion last year to $1.6 billion-$1.8 billion this year. Most of those expansion projects should start contributing to the company's cash flow by the end of this year, giving it momentum as it heads into 2024.

That gives it additional financial flexibility to capture new expansion opportunities as they arise. That's exactly what happened last month. The company agreed to acquire Lotus Midstream for $1.45 billion.

Energy Transfer structured the transaction so that it would have a neutral impact on its leverage ratios. Meanwhile, it will be immediately accretive to the company's distributable and free cash flow.

That deal allowed Energy Transfer to grow its cash flow while preserving its financial flexibility. Because of that, the company can make additional deals and approve new high-return expansion projects when it finds compelling opportunities. These future investments will help grow its cash flow, giving the MLP even more fuel to increase its distribution.

An enticing income option

After achieving its targeted leverage ratio, Energy Transfer is now in a much stronger financial position. It has given the MLP the flexibility to invest in growing its operations while also increasing its already sizable distribution. With more growth ahead, Energy Transfer is an attractive option for those seeking a big-time and growing passive-income stream.