Forget Energy Transfer: This Rock‑Solid Midstream Dividend Giant Is the Safer Income Play

Let me start by saying that Energy Transfer (NYSE: ET) is one of my favorite income stocks. I have held units of the master limited partnership (MLP) since 2020 and routinely add to my position. It's one of my largest sources of passive dividend income.

However, I think investors seeking a safe income play should forget about Energy Transfer. Instead, they should buy midstream dividend giant Enbridge (NYSE: ENB) to collect its rock-solid income stream.

Image source: The Motley Fool.

An even more rock-solid foundation

Enbridge is North America's energy infrastructure leader. It transports 30% of the oil produced on the continent and 20% of the gas consumed in the U.S. The Canadian company also operates the largest natural gas utility by volume and is a leader in renewable energy investment.

While Energy Transfer also has a large and diversified energy midstream footprint, it doesn't have the scale, diversification, or revenue stability of Enbridge. About 90% of Energy Transfer's earnings come from fees, with 5% to 10% tied to commodity prices. On the other hand, more than 98% of Enbridge's earnings come from regulated or take-or-pay contracts, with less than 1% tied to commodity prices. As a result, it produces very stable earnings. Enbridge's earnings are so predictable that it has achieved its annual financial guidance for 20 consecutive years. Meanwhile, Energy Transfer's earnings fell short of its initial financial expectations last year due to lower commodity prices.

One factor helping enhance the stability of Enbridge's earnings is its natural gas utility franchise. Gas utilities generate very resilient earnings due to steady demand and government-regulated rate structures. Enbridge also has a growing renewable power business, which generates very stable cash flow from long-term, fixed-rate power purchase agreements. These businesses further diversify and stabilize Enbridge's earnings profile.

A better balance sheet

Energy Transfer is currently in the strongest financial position in its history. The MLP has used some of its retained cash flow over the past several years to strengthen its balance sheet. As a result, its leverage ratio is now in the lower half of its 4.0-4.5 times target range. That supports the company's solid investment-grade credit ratings (BBB/Baa2).

Enbridge actually has a higher leverage ratio (4.5x-5.0x target range). However, the company has a higher credit rating (BBB+/Baa2). That's due to its larger scale, greater diversification, and lower-risk earnings profile.

The Canadian energy infrastructure giant's stronger financial profile provides it with additional flexibility to invest in growth projects. Enbridge can borrow about 5 billion Canadian dollars ($3.6 billion) per year to invest in expansion projects and make bolt-on acquisitions while remaining within its targeted leverage ratio. That boosts its total investment capacity to more than CA$10 billion ($7.3 billion) annually when including its post-dividend free cash flow. While Energy Transfer has significant investment capacity -- it plans to invest $5 billion to $5.5 billion in growth capital projects this year -- it's not quite the financial fortress that Enbridge is.

A more resilient dividend stock

Enbridge has been one of the most reliable dividend stocks in the energy sector. It has increased its dividend for 31 consecutive years (in Canadian dollars). That's a testament to its low-risk business profile and fortress balance sheet.

Energy Transfer hasn't been quite as reliable. The MLP cut its distribution in half in 2020 to retain additional cash to repay debt during the pandemic. While it's in a much stronger financial position these days, Energy Transfer still has a higher overall risk profile compared to Enbridge.

A safer option

I think Energy Transfer is a terrific income investment for those who are comfortable with its higher risk profile (and receiving the Schedule K-1 Federal tax form the MLP sends each year). However, if I were seeking a lower-risk income investment, especially for a retirement account (you can't buy an MLP in an IRA), I'd buy Enbridge over Energy Transfer.

Matt DiLallo has positions in Enbridge and Energy Transfer. The Motley Fool has positions in and recommends Enbridge. The Motley Fool has a disclosure policy.