Energy Transfer (ET -0.03%) will likely be of most interest to income-focused investors given its attractive 7.3% distribution yield. The distribution has been increased every quarter for nearly four years. In many ways this midstream master limited partnership (MLP) is very attractive. But in other ways it requires a leap of faith that some investors won't be willing to take. Here's what you need to know.
What does Energy Transfer do?
Energy Transfer is more complex than many of its peers. The core of the business is the MLP's own midstream portfolio, which consists of pipelines, storage, and transportation assets. There's nothing particularly special about this aspect of Energy Transfer. Like its peers, it charges fees for the use of the energy infrastructure it owns and tends to generate fairly reliable cash flows over time.
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In addition to the core portfolio, however, Energy Transfer also acts as the general partner for two other publicly traded MLPs, Sunoco LP (SUN -1.92%) and USA Compression Partners (USAC -0.74%). It also operates liquified natural gas projects. Sunoco delivers gasoline to gas stations and USA Compression Partners provides compression services (which increases the flow of material through pipelines) to energy companies. Both are run more aggressively than Energy Transfer.
On the one hand, the additional businesses provide an opportunity for growth. But, on the other hand, they also make Energy Transfer more complicated to follow. Enterprise Products Partners (EPD 0.43%) has a 6.7% yield and a much less complicated midstream business model. It only operates its own portfolio of pipelines, storage, and transportation assets. If simple is better for you, Enterprise's slightly lower yield would probably be the more appropriate choice.
The big problem with Energy Transfer
Income focused investors are likely looking at Energy Transfer's big yield and hoping it will set them up with a lifelong income stream. Enterprise Products Partners' 26-year history of annual distribution increases suggests that it could do that for investors. Energy Transfer's distribution cut in 2020, during the coronavirus pandemic, doesn't provide as much confidence. That's right, even though Energy Transfer's recent distribution history has been good, with yet another dividend increase in the first quarter of 2025 (a penny a share), go back just a few years and the story changes materially.
What's notable is that Energy Transfer's reasoning for the cut was that it needed to reduce leverage on its balance sheet. There's nothing wrong with that decision from a business perspective. However, it came at an interesting time, given that the energy sector was in a deep downturn. And then there was the impact of COVID, which led many governments to, effectively, shut down their economies. That led to a U.S. recession and a bear market.
Step back and think about what it would have been like to own Energy Transfer in 2020. Worried about a global pandemic, fearful of the economic uncertainty, and watching stocks behave erratically, how would you have reacted to a 50% distribution reduction? It probably would have come as a huge shock and at a time when you least wanted (yet another) shock in your life. If you had, instead, owned Enterprise Products Partners, you wouldn't have had to deal with that shock.
Can Energy Transfer set you up for life?
There are no crystal balls on Wall Street, so you have little choice but to examine past performance when considering the range of future outcomes. Energy Transfer is on a better trajectory than it was before its 2020 distribution cut thanks to an improved balance sheet, but can it set you up for life? Maybe, but history suggests you'll have to worry that it could also let you down on the income front. If you can't stomach the risk that Energy Transfer might let unitholders down again, Enterprise Products Partners will probably be a better option even though it has a slightly lower yield.
