I initially invested in Energy Transfer (ET +0.10%), one of the largest midstream companies in the U.S., about 18 months ago. I've increased my position several times since then, and the stock now accounts for 4.2% of my portfolio with a 23% gain.
Many investors buy Energy Transfer for its high forward yield of 6.6%, which is still higher than the 10-Year Treasury's 5.3%. That distribution is easily sustainable because it consumes only around half of its distributable cash flow (DCF) each year. That's also one of my top reasons for buying Energy Transfer, but there are plenty of other reasons to accumulate this pipeline stock.
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It's resistant to volatile commodity prices
Energy Transfer operates over 140,000 miles of pipeline in 44 states. It delivers crude oil, natural gas, natural gas liquids, and other refined products through its pipelines and marine export terminals. As a midstream company, it simply charges downstream and upstream companies "tolls" to use its infrastructure, so it's well insulated from volatile commodity prices.
It's exposed to the cloud and AI boom
U.S. data centers get more than 40% of their grid electricity from natural gas, according to the International Energy Agency (IEA). Energy Transfer's pipelines transport about 30% of all the natural gas produced in the United States, and it generates roughly 40% of its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) from its natural gas assets. Therefore, the ongoing expansion of the power-hungry cloud infrastructure and AI markets should boost Energy Transfer's natural gas volumes for the foreseeable future.
NYSE: ET
Key Data Points
It's more tax-efficient than other high-yield investments
Energy Transfer is a master limited partnership (MLP), which shields it from corporate taxes. MLPs also blend a return of capital with their own income in their distributions, so you'll only pay federal and state taxes on the income (unit depreciation) portion of those payments.
In other words, Energy Transfer's yield is more tax-efficient than standard C-corporations paying similar yields. By comparison, The Williams Companies (WMB +2.23%) -- another major pipeline player with even more exposure to the natural gas and AI markets -- pays corporate taxes to the government and fully taxable dividends to its investors because it isn't an MLP.
It's undervalued relative to its growth
Lastly, Energy Transfer looks undervalued relative to its growth potential. From 2025 to 2028, analysts expect Energy Transfer's earnings per unit (EPU) to grow at a 14% CAGR. At $20, it still looks like a bargain at 12 times this year's EPU.
That low valuation -- along with its high yield, wide moat, and exposure to the AI boom -- makes Energy Transfer a safe stock to buy and hold even as rising Treasury yields rattle the market. It's not an exciting investment, but it will help you sleep better at night.
