Is Energy Transfer Stock a Buy Now?

Energy Transfer (NYSE: ET) has a very attractive 7.9% distribution yield. For comparison, the S&P 500 index (SNPINDEX: ^GSPC) is only offering a yield of 1.1%, and the average energy stock's yield is 3.3%. But before you run out and buy this high-yield business right now, there are a few facts you need to know.

What does Energy Transfer do?

Energy Transfer's core business is moving oil and natural gas. Its portfolio of pipeline, transportation, processing, and storage assets is vital to the energy sector's proper operation. Essentially, Energy Transfer helps to connect the upstream (energy production) to the downstream (chemicals and refining) and to the rest of the world.

Image source: Getty Images.

Unlike the upstream and downstream, however, Energy Transfer's business isn't tied to commodity prices. The master limited partnership (MLP) essentially collects fees for the use of its energy infrastructure assets. So the volumes flowing through its system are more important than the price of oil and natural gas. Volumes tend to remain stable even during oil downturns because of the importance of this energy source to the global economy.

In the third quarter of 2025, Energy Transfer's distribution looked very solid. The MLP's distributable cash flow covered the distribution by 1.65 times. Moreover, Energy Transfer believes the business is stronger financially today than it has ever been in its history, with debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) within the target range of 4 times to 4.5 times.

Presumably, the distribution is safe, given that management is targeting a 3% to 5% distribution growth rate for the foreseeable future while maintaining it current leverage levels. That growth is going to be powered by capital investments totaling $5 billion in 2026 alone. There are more projects on the horizon, as well.

A less-than-stellar history

Energy Transfer does, indeed, appear to be an attractive income investment right now. But there's a caveat. In 2020, the MLP cut its distribution in half. That move appears to have achieved its main goal of allowing the company to strengthen its balance sheet.

However, it is hard to ignore the fact that the cut occurred during the oil downturn, which coincided with the COVID-19 pandemic. That was a very uncertain period, but one during which dividend investors would likely have preferred to see distribution consistency instead of a distribution cut.

In fairness, the distribution is now back in growth mode. The quarterly payment is now higher than it was prior to the cut. However, investors who relied on the income from Energy Transfer to cover their living expenses would have been sorely disappointed by the cut. It is likely that some ended up selling the MLP due to the cut, meaning they did not benefit from the subsequent distribution recovery.

The risk of another cut appears fairly low at present, but conservative dividend investors would be justified in having second thoughts about investing in Energy Transfer. The 2020 cut was, in fact, the second worrying move.

The first occurred during the 2016 energy downturn, when Energy Transfer agreed to acquire Williams Companies (NYSE: WMB) but then changed its mind. To avoid the deal, the company issued convertible securities that appeared to protect the buyers from a dividend cut, which management said might be necessary if the Williams deal were completed as planned. The CEO at the time bought a significant amount of the convertible, making it appear as if insiders were being protected at the expense of shareholders.

It would be entirely reasonable for risk-averse investors to have trust issues in this scenario. This is why it is important to note that Energy Transfer isn't the only high-yield midstream investment you can buy. Peer Enterprise Products Partners (NYSE: EPD) has a 6.8% yield, an investment-grade credit rating, and a 27-year streak of annual distribution increases, which is roughly as long as the MLP has been publicly traded.

Energy Transfer requires a lot of trust

You can easily argue that 2020 and 2016 are ancient history on Wall Street. That's fair, and Energy Transfer does appear to be on much stronger financial ground right now.

However, putting a price on trust is challenging. It could be hard for conservative investors to sleep at night when another energy downturn comes along. So Energy Transfer is most appropriate for more aggressive investors. Conservative investors may want to consider a more reliable peer, such as Enterprise Products Partners.

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.