When you invest for income, there's a huge temptation to buy the highest-yielding investments you can. That's understandable since it will result, at least in the near term, in a larger income stream. But you have to resist that temptation if you are a long-term dividend investor.
Sometimes, it is better to buy a lower yield backed by a historically well-run company than to buy a high yield from a company with a less-than-impressive history. This is exactly the case when you compare Energy Transfer (ET 0.05%) to Enterprise Products Partners (EPD +0.89%) today.
What does Energy Transfer do?
Energy Transfer is an energy company with a focus on the midstream segment of the industry. That means it owns the infrastructure that helps to move oil and natural gas around the world.
The key, however, is that Energy Transfer's business is heavily fee based. As a toll taker, the price of the commodities flowing through its system is less important than the demand for those products. Energy demand tends to remain strong no matter what is going on with energy prices.
NYSE: ET
Key Data Points
Enterprise Products Partners is basically the same story. Like Energy Transfer, it is one of the largest midstream players in North America. There are clearly differences in the underlying assets each of these MLP's owns, but it would be understandable if an investor viewed them as somewhat interchangeable from a business perspective.
And given that Energy Transfer's distribution yield is 7% while Enterprise's yield is 6.4%, you might be tempted to simply opt for the higher yield. That's a mistake.
Why Enterprise Products Partners is a better choice
There are a few reasons for this, but the first one relates directly back to the distribution. While Energy Transfer's distribution has been increasing lately, it was cut in half during the coronavirus pandemic. The energy sector was under severe strain at that time, so the decision to cut the distribution isn't unreasonable. It ensured the MLP had liquidity in what was a very uncertain time.
Enterprise Products Partners increased its distribution in 2020 and has now increased its distribution annually for 26 consecutive years. There have been multiple energy downturns in the last quarter century, so Enterprise has clearly shown itself to be a more reliable income stock.
ET Dividend Per Share (Quarterly) data by YCharts
The next reason to prefer Enterprise Products over Energy Transfer is financial strength. As the chart below highlights, Energy Transfer's debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio has come down materially over the past decade.
That's good, but Enterprise Products Partners' debt-to-EBITDA ratio was lower the entire time and still remains lower. In fact, Enterprise's leverage is generally at the low end of the industry relative to similarly sized peers. It is conservatively managed and always has been.
ET Financial Debt to EBITDA (TTM) data by YCharts
The third reason is a bit more nebulous, and some investors might think the story is too old to care about today. However, in 2016 Energy Transfer agreed to buy Williams Companies. An energy industry downturn led it to reconsider that deal and, eventually, kill it. To do so, Energy Transfer issued convertible securities, selling a notable amount of the hybrid assets to the then CEO -- a process that some observers questioned. That CEO is the current chairman of the board of directors.
NYSE: EPD
Key Data Points
This was a complicated period, and the decision to scuttle the Williams deal was probably the right call. However, the manner in which the deal was ended is troubling and suggests that Energy Transfer was more worried about insiders than unitholders. There is no similar event in Enterprise Products Partners' past. And when you combine Energy Transfer's 2016 decision with the distribution cut in 2020, it creates a troubling pattern if you are an income investor.
No company is perfect, but why settle?
Every business goes through hard times. And every business makes decisions that it later regrets. However, if you are comparing Enterprise to Energy Transfer, it is pretty clear that Enterprise is the more reliable income stock. It isn't worth the 60 basis points more in income you will get from stepping down into Energy Transfer, which is simply a less desirable midstream investment when you look at distribution reliability, leverage, and big decisions that have impacted unitholders.
