Dividend investors are often drawn in by a huge yield. That makes sense in some ways, but it can lead yield-hungry investors to take on more risk than perhaps they should.
A good example today is Energy Transfer (ET 0.12%), which has a huge 9.6% distribution yield as compared to Enterprise Products Partners (EPD 0.45%), which offers a lower 7.5% yield. If you are trying to live off the income your portfolio generates, history suggests the lower-yielding master limited partnership (MLP) will be a much safer choice.
A look at today's distribution
It's pretty obvious that collecting the 9.6% distribution yield from Energy Transfer will lead to more income than the 7.5% yield from Enterprise. And to be fair, Energy Transfer produced distributable cash flow of around $2 billion in the first quarter of 2023. While that was down 3% year over year, it was more than enough to cover its distribution.
In fact, it had $965 million in cash left over after paying its distribution. Those numbers mean that the MLP's distributable cash flow covered distributions by a very solid 1.9 times.
But Enterprise is no slouch on this front, either. It also had 1.9 times coverage in the first quarter. Meanwhile, its distributable cash flow of roughly $1.9 billion was actually up 5.5% year over year. One quarter doesn't make a trend, but the point is that both of these midstream partnerships have well-supported distributions today.
Consistently returning value
The problem for Energy Transfer comes when you start to compare distribution histories. Enterprise's history is pretty straightforward. It has increased its distribution annually for 24 consecutive years. Basically, through thick and thin, the MLP has made sure that its shareholders receive a steady and growing quarterly disbursement.
ET dividend per share (quarterly), data by YCharts.
Energy Transfer, on the other hand, cut its distribution in half in 2020 as the energy industry faced difficult times during the early days of the pandemic. That cut came after a long period in which the distribution had headed generally higher, and was likely a reasonable decision given the uncertainty at the time.
But investors trying to live off the income they generate will probably be much happier with Enterprise's history on this front even though Energy Transfer's distribution is back in growth mode again.
Trust
The next big issue here is less tangible. Enterprise Products Partners is a fairly conservative MLP. For example, its ratio of debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) is generally among the lowest of its closest peer group.
Energy Transfer's ratio is fairly modest today, just a touch above that of Enterprise, but it has historically been more volatile and, at times, much higher. Acquisitions are partly to blame for that trend, but investors need to understand that leverage increases risk.
That isn't the only thing to consider. In 2016, Energy Transfer inked a deal to buy peer Williams Companies (WMB -0.48%). Then the energy sector headed into a downturn and the deal suddenly looked like a mistake that would either require a massive increase in debt, a distribution cut, or both.
Energy Transfer eventually succeeded in scuttling the deal. The problem is that during this process, it sold convertible securities in a private placement, much of which went to the CEO at the time. The securities would have basically protected him from the impact of a distribution cut.
That CEO is currently the board chairman and one of the largest unitholders. It is a complex tale, but the big takeaway is that it appears that the MLP protected insiders over unitholders, and an aggressive use of debt was part of that situation.
Putting it all together
All in, Energy Transfer and Enterprise appear to have similarly strong businesses today. But they don't have similarly strong corporate histories. Energy Transfer has cut its distribution when times were tough and appears to have favored insiders at the expense of unitholders when dealing with a merger that had gone sour.
Sure, you'll have to give up some yield if you buy Enterprise Products Partners, but you'll probably sleep better at night knowing the MLP places a high value on being a reliable steward of unitholder capital in good times and bad.
