Some companies have high dividend yields due to concerns about their financial situations. Others have high yields because they trade at dirt cheap valuations. Energy Transfer (ET +0.51%) is in the latter group.
As a result, you can generate a lot of passive income by investing in this master limited partnership (MLP). At its current 7.9% yield, you'd only need to invest $4,500 to generate over $350 in annual passive income. Here's a closer look at why the energy midstream giant offers such an attractive payout these days.
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A bottom-of-the-barrel valuation
Energy Transfer is on track to generate over $16 billion of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) this year. At its current enterprise value (EV), the midstream giant trades at less than nine times EV to EBITDA. That's the second-lowest level in its peer group, where the average is closer to 12 times.
There's no reason for Energy Transfer to trade at such a dirt cheap valuation. The company generates very stable cash flows, as fee-based sources supply about 90% of its earnings. Meanwhile, its earnings are growing at a healthy rate. While its earnings growth rate will slow this year to around 4% (down from a 10% compound annual growth rate from 2020 to 2024), it expects a reacceleration in 2026.
NYSE: ET
Key Data Points
Additionally, it's in its strongest financial position in history. Energy Transfer generated enough cash to cover its high-yielding payout by nearly 1.9 times through the first half of this year. Meanwhile, its leverage ratio is in the lower half of its 4.0-4.5 times target range.
We can draw two conclusions from these numbers. Energy Transfer is a dirt cheap value stock, and the MLP's high-yielding payout is on a very sustainable foundation.
The fuel to continue growing its payout
One of the nice things about Energy Transfer is that it offers more than a bond-like income stream. The MLP is growing its earnings and distribution at healthy rates.
The company plans to invest about $5 billion into growth capital projects this year. Notable projects include its Nederland Flexport NGL Expansion, Hugh Brinson natural gas pipeline, and multiple new natural gas processing plants. The bulk of these projects have just entered commercial service or will come online by the end of next year. As a result, they should fuel a reacceleration in its earnings growth rate in 2026 and 2027.
Energy Transfer has recently approved several additional growth capital projects, significantly extending its long-term growth outlook. It now has projects scheduled to enter commercial service every year through the end of the decade. The biggest new project is the $5.3 billion Desert Southwest Expansion Project, which has an estimated in-service date in the fourth quarter of 2029.
Meanwhile, the company is working to approve several additional expansion projects. The largest is the Lake Charles LNG export terminal, which it hopes to finally approve early next year. Energy Transfer is also evaluating several opportunities to expand its natural gas pipeline infrastructure to support growing gas demand by AI data centers.
Energy Transfer's growing pipeline of expansion projects will give it more fuel to increase its distribution. The company conservatively plans to raise its payout by 3% to 5% per year. It has been giving investors a raise each quarter, enabling them to steadily collect more passive income.
A low-cost way to collect lots of passive income
Energy Transfer trades at a near-rock-bottom valuation, which is why it offers such a high yield. As a result, investors can generate substantial passive income from the MLP. While this income may have some tax complications because the MLP sends investors a Schedule K-1 Federal Tax Form each year, the big-time yield and possible tax benefits can make it worthwhile. For those willing to handle the additional tax paperwork, Energy Transfer is a great stock to buy to collect an attractive, steadily growing passive income stream.
