If you're on the hunt for an investment that can provide a steady stream of passive income, look no further than dividend stocks. One that stands out is Energy Transfer (ET +0.14%), which boasts an impressive 7.1% dividend yield. What makes Energy Transfer particularly attractive is its stable cash flow from midstream operations.
With the surge in oil and gas production across the U.S. and a regulatory landscape becoming increasingly favorable for expansion, Energy Transfer is well positioned. Here's what investors should know today.
NYSE: ET
Key Data Points
Energy Transfer stands to benefit from U.S. oil and gas production
The first thing investors should be aware of is that Energy Transfer operates as a master limited partnership (MLP). MLPs don't pay taxes at the corporate level. Instead, profits are distributed to investors (limited partners), allowing MLPs to return more cash to their unitholders compared to typical corporations. This is why Energy Transfer offers an appealing distribution yield of over 7%.
As a midstream operator, Energy Transfer earns revenue by transporting, storing, and processing oil, gas, and natural gas liquids under long-term contracts. Its contracts are often fee-based, which can help stabilize revenue. This reliable cash flow also enables consistent, high distributions to investors, which the company aims to grow between 3% to 5% annually.
Energy Transfer boasts one of the largest and most diversified portfolios of energy infrastructure in the United States, including major natural gas liquids, crude oil, and natural gas pipelines, as well as storage facilities, export terminals, and processing plants.
Its scale provides it with geographic reach across key basins, enabling it to serve upstream drillers, downstream refiners, and other markets. Its location in those key regions means it benefits from the network effect. In other words, as more producers and end users connect, its infrastructure becomes more valuable.
With the U.S. aiming to increase energy production and achieve American energy dominance under President Donald Trump, Energy Transfer stands to benefit from higher volumes being transported and processed across its extensive infrastructure network.
Image source: Getty Images.
It has improved its financial position
One criticism of Energy Transfer is that it has been aggressive in its acquisitions and capital-intensive projects, utilizing debt or raising capital through unit sales to fund them. Major acquisitions and projects in recent years include its $3.25 billion deal to acquire WTG Midstream Holdings and spending $2.7 billion to expand the Hugh Brinson Pipeline. The deals help to expand Energy Transfer's pipeline and processing network, but some worry that it has increased its leverage to do so.
The company has made progress in reducing its debt burden and strengthening its financial position. Over the past several years, it has utilized excess cash flow to reduce debt and improve its net debt-to-EBITDA ratio.
We can see this progress in Energy Transfer's leverage ratio. According to the company, its leverage ratios are now in the lower half of its target range of 4.0 to 4.5 times. Based on approximately $60.6 billion in total debt and $15.7 billion in EBITDA, the company has a debt-to-EBITDA ratio of 3.85, which is on the lower end for the company over the past decade.
Investors should consider this before buying Energy Transfer
As an MLP, Energy doesn't pay taxes and instead passes on profits to its investors. This can help avoid double taxation that corporations face, but it also comes with some unique tax treatment. Profits are distributed to investors (called unitholders), typically via a Schedule K-1 form, which can complicate tax filing and create headaches for investors accustomed to simpler forms.
They may also generate UBTI (unrelated business taxable income), which can be a problem if held in retirement accounts such as IRAs. If you earn more than $1,000 in UBTI, you must file a Form 990-T and may owe taxes (even though IRAs are tax-deferred). This makes a stock like Energy Transfer ideal for a taxable brokerage account.
This added tax treatment is something to consider if you are investing in Energy Transfer or similar companies that are structured as a master limited partnership. However, if you're willing to deal with the additional tax implications, Energy Transfer is a solid dividend stock to add to your portfolio today.
