For investors seeking stocks with high yields and rising dividends, the energy midstream space is a great place to look. Two of the top stocks in the space are Energy Transfer (ET +1.95%) and Enterprise Products Partners (EPD +2.27%).
The two pipeline master limited partnerships (MLPs) have expansive midstream systems in the U.S. that handle different types of hydrocarbons, like natural gas, oil, and natural gas liquids (NGLs). They also both have attractive yields and have been increasing their distributions. Which stock is the better of the two to own, though, could largely come down to the type of investor you are.
Energy Transfer: The growth and dividend combo
NYSE: ET
Key Data Points
Energy Transfer has one of the largest and most diverse midstream businesses in North America, with around 140,000 miles of energy infrastructure assets across the U.S. located in all major basins and connecting to major markets across the country. The company has never been afraid to chase growth, and it is currently in full growth mode, given the attractive opportunities it is seeing around natural gas.
The company has a very strong position in the Permian Basin, which is the United States' most productive and lowest-cost oil basin. It has also been home to some of the cheapest natural gas in the country due to pipeline takeaway constraints, although that is starting to ease with the start-up of new pipelines, including Energy Transfer's Hugh Brinson Pipeline. This pipeline, which recently came online, is one of the company's most important projects, as it can take natural gas from the Permian and supply it to markets throughout Texas and beyond, helping support the growing AI data center market. It also has another pipeline project that will take natural gas in the opposite direction to the Arizona and New Mexico markets.
In total, Energy Transfer expects to spend up to $5.9 billion on growth capital expenditures (capex) this year. These projects are all backed by long-term contracts, and the company expects to get mid-teen returns on its investments. Meanwhile, it is looking to raise its distribution at a 3% to 5% annual pace moving forward. With over 90% of its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) coming from fee-based sources and a robust coverage ratio, the distribution is well supported, while the company's extensive system also allows it to frequently take advantage of market pricing dislocations.
Enterprise: The Steady Eddie
NYSE: EPD
Key Data Points
While Energy Transfer tends to take a more aggressive approach, Enterprise is conservative by nature. The company has very low leverage for the sector at 3 times, while also keeping a robust coverage ratio of 1.9 times last quarter. This approach has helped the company increase its distribution for 28 straight years through all types of energy markets and economic crises.
During periods of uncertainty, Enterprise has been quick to reduce its growth capex, taking it down to $1.8 billion and $1.6 billion in 2021 and 2022 after the COVID-19 pandemic. It plans to spend up to $4 billion this year, given the strong project opportunities it is seeing. While 2026 is a transitional year, Enterprise is projecting double-digit adjusted EBITDA and distributable cash flow (operating cash flow minus maintenance capex) growth in 2027.
The company's balance sheet is a major source of strength. In addition to its low leverage, it also has the highest credit rating in the midstream space and long-term debt at an attractive 4.7% weighted average cost. Meanwhile, Enterprise has been increasing its distribution at a 3% pace, which is something I'd expect to continue with the potential to boost that next year when its DCF growth will accelerate.
Image source: The Motley Fool.
The verdict
Whether Energy Transfer or Enterprise is the better stock to own really depends on the investor. For those looking for a steady, sleep-well-at-night investment, Enterprise is the clear choice given its track record. However, for investors looking for more potential upside, Energy Transfer is the better option. The stock is cheaper (forward enterprise value-to-EBITDA ratio of 8.3 vs. 10.7), has a higher yield (6.5% vs. 5.8%), and has more growth projects.
I own both and think you can't go wrong picking either. However, which one is the best to choice really depends what you're looking for. Of course, you can always own both.
