It's always nice to see the prices of your stock appreciate, but that's not the only way to make a good amount of money in the stock market. There are also dividends, which are more predictable and can significantly contribute to your total returns.
As of June 30, the S&P 500's dividend yield is just under 1.3%, but there's an ultra-high-yield dividend stock that offers a yield over 5.5 times that amount: Energy Transfer (ET 0.39%).
It hasn't been the best year for Energy Transfer, down over 7% through June 30, but the company has plans in the works that make it a dividend stock worth considering.
How Energy Transfer's business is structured
The energy industry is divided into three segments: upstream, midstream, and downstream. Upstream companies find and produce oil and gas; midstream companies transport and store oil and gas; and downstream companies turn the oil and gas into end-products like gasoline, diesel, and other fuels.
Energy Transfer primarily operates in the midstream sector, with over 130,000 miles of pipeline in 38 states, making it one of the largest midstream companies in the U.S.
It makes money by charging fees based on volume, and these contracts are often locked into longer-term agreements (20+ years). This helps it maintain relatively stable revenue.
A dividend worth considering
Unlike a typical company structured as a corporation, Energy Transfer is a limited partnership (LP). In an LP, profits and losses are passed on to partners (investors), allowing the LP to avoid taxes and distribute more money to its investors. This is why Energy Transfer is able to maintain its high dividend payout.
Its current dividend yield is slightly below its three-year average, but it remains one of the highest among Fortune 500 companies.
ET Dividend Yield data by YCharts
Energy Transfer's dividend payout fluctuates because it depends on its distributable cash flow (DCF), but it aims to increase it by 3% to 5% each year.
Energy Transfer has plenty of growth projects ahead
In the first quarter (Q1), Energy Transfer's revenue decreased 2.8% year over year (YOY), and its DCF fell by 4.1% YOY to $2.31 billion. This isn't ideal, but it's not a cause for concern with the energy sector known for being cyclical.
Even with the revenue slowdown, Energy Transfer managed to increase its revenue by 7% year over year to $1.32 billion. The company says it currently has its "strongest financial position in partnership history," and this is expected to continue with the projects it has in the works.
Some notable recent accomplishments and projects in the work include:
- Signed a 20-year contract with Chevron to provide additional natural gas through its pipeline.
- Expanded its Permian Basin capacity to accommodate growing natural gas demand.
- Signed an agreement with CloudBurst to provide natural gas to its AI-focused data center.
- Signed an agreement to supply Kyushu Electric Power.
Energy Transfer is continuously expanding its footprint by investing in growth projects and making acquisitions (although some have complained about how much they're spending on them), setting itself up for sustained growth and consistent cash flow.
Is it worth owning Energy Transfer?
A high dividend yield is great, but that alone doesn't make a stock a good investment. In Energy Transfer's case, however, it has a solid business to back its dividend. It has a solid customer base, growth opportunities, and good financial health.
If you can deal with the additional tax step needed when dealing with LPs and their distributions (like filing a Schedule K-1 form), then there's plenty to gain from owning Energy Transfer's stock.
