Is Energy Transfer Stock a Buy Now?

Key Points

• Energy Transfer is one of the largest midstream operators in North America.

• The business is largely fee-based, which provides reliable cash flows to cover the large 7.5% yield on offer.

• A key insider is buying, but that may be more problematic than it seems once you look back at this 2016 event.

• 10 stocks we like better than Energy Transfer ›

Energy Transfer (NYSE: ET) has some very notable positives to offer dividend lovers. But the good things here come along with some negative baggage. While every business has its warts, the problems with Energy Transfer might be enough to make a conservative income investor look at a competitor like Enterprise Products Partners (NYSE: EPD), which has a slightly lower yield and a much better history of caring about its unitholders.

Here's what you need to know.

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What does Energy Transfer do?

From a top-level view, Energy Transfer looks like a great investment opportunity for dividend investors. It operates in the highly volatile energy sector, but in the highly reliable midstream niche. That basically means it owns a collection of energy infrastructure assets that help to move oil and natural gas around the world. It is a toll-taker model, with Energy Transfer largely charging customers fees for the use of its assets.

Given that energy is so vital to the world economy, demand for energy tends to be robust even when energy prices are weak. Thus, the fees Energy Transfer generates are fairly consistent over time. In fact, in the second quarter of 2025, Energy Transfer's distributable cash flow covered its distribution by 1.7x. It seems like a lot would have to go wrong before a distribution cut was in order.

Given the huge and well-covered 7.5% distribution yield being paid by this midstream master limited partnership, it makes sense that dividend investors would be interested. And then there's another interesting positive in the fact that the executive chairman of the board of directors, Kelcy Warren, bought nearly 34.7 million units in August. Insider buying like that is often a sign of confidence in a business's future.

There's a trust issue that conservative investors can't ignore

No investment comes without some negatives, which means you need to weigh both the good and the bad before you buy anything. In the case of Energy Transfer the negative is trust. There is a recent example of that and an even more important one that's further back.

In 2020, during the COVID-19 pandemic, Energy Transfer cut its distribution. Given the uncertainty at the time and an energy industry downturn, this was probably the right move for the MLP. But if you were an income-focused investor trying to live off the income your portfolio generated at the time, you would have been sorely let down. Go back to 2016, however, and there's an even more difficult problem to digest.

In 2016, the energy sector was also going through a downturn. Energy Transfer agreed to buy peer Williams Companies. The CEO of Energy Transfer at the time was Kelcy Warren. As the energy sector downturn unfolded, Energy Transfer decided that completing the Williams deal would necessitate either a huge amount of debt or a dividend cut (perhaps even both). It chose to scuttle the merger.

To do that, the company issued convertible securities. Kelcy Warren purchased a large percentage of those securities. It appeared, however, that the convertible securities would protect the owners from the impact of a dividend cut if one were enacted by Energy Transfer. It was a very bad look at the time, and it would be reasonable for investors to wonder if insiders are more important than unitholders.

Similar yield, fewer problems

In the end, Kelcy Warren buying even more Energy Transfer units may not be positive. It effectively gives Warren even more influence. What's interesting here is that peer Enterprise Products Partners has a similarly high yield at around 6.9%, but that yield is backed by 27 consecutive annual distribution increases. And there's no similar incident to the 2016 Williams deal in Enterprise's past. More conservative income investors will probably be better off giving up a little yield and going with Enterprise over Energy Transfer and its problematic history.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.