When the stock market is volatile, investors often turn to dependable dividend payers, and the energy sector is a good place to find them. However, many energy stocks are also cyclical, so declining commodity prices can crush their profits and disrupt their dividends. That can result in nasty surprises for investors who don't closely follow the prices of oil, natural gas, and other natural resources.
So, instead of assuming all of the blue-chip energy stalwarts are safe-haven income plays, investors should learn to separate the cyclical stocks from the evergreen ones. One of my favorite evergreen energy stocks is Energy Transfer (ET 0.29%), a midstream pipeline operator that's well insulated from macroeconomic headwinds and pays high distributions.
Here are five simple reasons why it's still a great place to park $10,000 in this messy market.
Image source: Getty Images.
1. Midstream pipeline operators are resistant to recessions
As a midstream company, Energy Transfer provides pipeline, storage, and terminal services for natural gas, natural gas liquids (NGLs), crude oil, and refined petroleum products. It operates over 130,000 miles of pipeline in more than 40 states, Puerto Rico, Mexico, and Europe.
Energy Transfer's "toll road" business model charges upstream drilling companies and downstream refining companies fees for using its infrastructure. Therefore, it isn't sensitive to volatile oil and gas prices and generates stable profits as long as its pipelines keep flowing.
2. Energy Transfer generates stable profits
Energy Transfer is a master limited partnership (MLP), a structure that blends the tax advantages of a private partnership with the liquidity of a publicly traded stock. MLPs usually report their profits as their earnings per unit (EPU) instead of their earnings per share (EPS). Energy Transfer also regularly gauges its bottom-line growth with its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), which tunes out some of the noise from its investments and acquisitions.
From 2014 to 2024, Energy Transfer's EPU and adjusted EBITDA grew at compound annual rates of 8% and 11%, respectively. They continued to grow even as the pandemic, inflation, rising interest rates, and geopolitical conflicts rattled the energy sector.
For 2025, it expects its adjusted EBITDA to rise by 4% to 6%. Analysts expect its EPU to grow 16%. That indicates it's still well insulated from the macro headwinds.
NYSE: ET
Key Data Points
3. Energy Transfer can support its high distributions
Energy Transfer cut its distribution in half in 2020 to conserve cash during the pandemic. However, it has raised its quarterly payout a whopping 13 times since then.
It currently pays a forward annual distribution of $1.31 per unit, which should be covered by its estimated EPU of $1.33 for 2025. At the current share price, that gives it a forward yield of 7.6% -- which is much higher than the 10-year Treasury's 4.4% yield. That high yield should attract even more income-seeking investors if interest rates start to decline.
4. Energy Transfer looks reasonably valued relative to its industry peers
At $17, Energy Transfer's stock trades at just 13 times its estimated EPU for 2025. It looks reasonably valued relative to similar midstream MLPs like Energy Products Partners (EPD +0.41%), which trades at 11 times this year's EPU but offers a lower forward yield of 6.9%.
5. Energy Transfer is an AI power play
Energy Transfer might not seem like an artificial intelligence (AI) stock, but management expects the build-out of energy-hungry data centers to generate strong tailwinds for its business. To meet the market's expected demand for more fossil fuels, the MLP is expanding its capacity in the Permian Basin. It also struck a deal with CloudBurst to deliver natural gas to its AI-oriented data center campus in Central Texas, and it has received requests to potentially connect around 200 other data centers and over 60 power plants across 14 states.
It's a simple stock to buy, hold, and forget
Energy Transfer might face some regulatory challenges or opposition from environmental groups in the future. But it's still firing on all cylinders, it has plenty of irons in the fire, and it should remain a tariff-proof stock for conservative income investors in this volatile market.
