In the constellation of energy stocks today, Energy Transfer (ET 0.13%) is a standout, offering investors a lofty 7.7% yield. That's extremely attractive given that the S&P 500 index, even after a big sell-off, is only yielding around 1.3%. The average energy stock is yielding just 3.1%.
But before you rush off to buy shares of this Dallas-based pipeline company because of its high yield, you need to know a little bit more about its distribution history. In the end, you might be better off with an industry peer, Enbridge (ENB +0.18%). Here's why.
Energy Transfer's yield is good today
Energy Transfer has a lofty 7.7% yield right now. As noted, that is well above average and it's even higher than Enbridge's 5.8% yield. If all you care about is the yield that exists today, Energy Transfer is the clear winner. But a look back at the history of the master limited partnership's yield is very telling.
ET Dividend Yield data by YCharts
While Enbridge's yield has waxed and waned over time, it hasn't seen massive peaks and valleys. Energy Transfer's yield rocketed higher in 2016 and 2020. "Why?" should be the first word to pop into your mind. The answers are a bit unsettling.
In 2016, the energy sector was going through a rough patch. Energy Transfer agreed to buy Williams Companies (WMB +1.08%) but quickly got cold feet. It was an ugly period, and investors were worried that the acquisition, if it were completed, would lead to a dividend cut. That didn't happen, but there were clearly some worrying decisions made by Energy Transfer during the period based on the market reaction.
In 2020, meanwhile, Energy Transfer cut its distribution in half because of the uncertainty surrounding the coronavirus pandemic. Most dividend investors are looking for reliable income streams, not ones that get cut in the face of adversity. To be fair, the distribution is increasing again and is now above where it was before the cut. But Energy Transfer basically let investors down right when they probably needed income the most.
NYSE: ET
Key Data Points
Enbridge has a better dividend history
While it probably wouldn't be a huge mistake to buy Energy Transfer, that doesn't mean it would be the best decision, either. If you are one of those dividend investors that actually finds dividend reliability important, well, Enbridge is probably going to be more to your liking. The Calgary-based company has increased its dividend, in Canadian dollars, for 30 years and counting.
Like Energy Transfer, Enbridge is one of the largest midstream companies in North America. So, at their core, they are roughly similar. That said, Enbridge also layers in regulated natural gas utilities and a small contract-driven clean energy business. That added diversification, making up around a quarter of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), helps to stabilize cash flows and solidifies the company's growth outlook.
All of this, meanwhile, is layered on top of an investment-grade-rated balance sheet. When Energy Transfer cut its distribution in 2020, the reason was to reduce debt, which basically means the midstream giant got out over its skis and needed to readjust. That was partly related to its growth-via-acquisition approach. Enbridge, notably, has a long history of acquisitions that have included debt, and it has never resorted to a dividend cut.
NYSE: ENB
Key Data Points
Trading down on yield is worth it if you need the income to live
If your only goal is to maximize the income your portfolio generates, Energy Transfer is the clear winner over Enbridge. But a big yield is only attractive if you can trust that the dividend will keep getting paid. Energy Transfer's history suggests that may not be something you can count on. Enbridge, while offering a lower yield, has proven, for three decades, that paying shareholders a reliable and growing dividend is a top priority. If getting paid is your priority, Enbridge is likely to be a better choice than Energy Transfer.
