What Every Energy Transfer Investor Should Know Before Buying

Energy Transfer (NYSE: ET) is one of the more popular energy stocks. A big driver of its popularity is the midstream company's monster yield. At over 8%, it's several times higher than the S&P 500 (1.2% yield).

However, there are a few key factors every investor should consider before purchasing this high-yielding energy stock.

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Energy Transfer is a master limited partnership

Energy Transfer has organized its business as a master limited partnership (MLP) for tax purposes. MLPs combine the tax advantages of a limited partnership with the liquidity benefits of a publicly traded company.

One of the advantages of MLPs is that they don't pay federal income taxes. Instead, these entities pass through gains, income, losses, and deductions to investors who report their share on their personal tax returns. These limited partners (LPs) receive a Schedule K-1 Federal Tax Form instead of a 1099-DIV Form to complete their taxes. The Schedule K-1 Federal Tax Form can complicate a recipient's tax filing. It can delay your return (many MLPs don't send their K-1s until March), and in some cases, LPs will need to file additional state returns to report their MLP income.

However, investing in MLPs has several advantages for individual investors. They typically make high-yielding distribution payments, making them appealing passive income investments. Additionally, investors can take a 20% qualified business income deduction, which the One Big Beautiful Bill made permanent in 2025.

Energy Transfer pays a sustainable and steadily rising distribution

Energy Transfer operates a diverse portfolio of midstream energy assets, which provides it with very stable cash flow. Fee-based sources, such as long-term contracts and government-regulated rate structures, account for about 90% of its annual income.

Through the first nine months of 2025, Energy Transfer generated $6.1 billion of distributable cash flow (money it could distribute to LPs). That was enough cash to cover its current distribution level by a very comfortable 1.8 times. Energy Transfer also has a leverage ratio toward the low end of its 4.0-4.5 times target range.

Those strong financial metrics put Energy Transfer in the best financial position in its history. They also give it a lot of financial flexibility to continue expanding its leading energy midstream platform. The MLP currently expects to fund $4.6 billion in organic expansion projects this year and an additional $5 billion in 2026. It has projects lined up to enter commercial service through the end of the decade. These expansions should grow its distributable cash flow, supporting the company's plans to increase its quarterly distribution payment by 3% to 5% per year.

A lucrative and growing tax-advantaged income stream

Energy Transfer offers investors a high-yield distribution backed by a rock-solid financial profile. The MLP has the financial flexibility and secured expansion projects to grow its payout in the coming years. Those features make it an appealing option for investors seeking an attractive tax-advantaged income stream and who are comfortable with the potential tax complications of investing in an MLP.

Matt DiLallo has positions in Energy Transfer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.