Everyone Loves This 6.5% Pipeline Yield. Here's the Risk I Think They're Ignoring.

Energy Transfer (TXSE: ET) is targeting 3% to 5% annual distribution growth for the foreseeable future. That's basically what investors have gotten from peer Enterprise Products Partners (NYSE: EPD) for decades. If you don't consider the history of these two master limited partnerships (MLPs), you might choose Energy Transfer's higher 6.5% yield. But if you place a high value on trust when making an investment, as I do, you may be better off with Enterprise's 5.8% yield. Here's what you need to know.

Enterprise has been reliable and boring

Enterprise is most definitely not a more exciting investment than Energy Transfer. But income investors usually prefer boring, reliable investments. On that front, Enterprise's well-above-market 5.8% yield is backed by 28 consecutive annual distribution increases, an investment-grade-rated balance sheet, and a solid distributable cash flow coverage ratio of 1.7x in 2025. There's a lot of room for adversity before a distribution cut would be in the cards.

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Enterprise is the kind of passive income investment you buy and check in on a few times a year. Not one you have to watch like a hawk. That isn't something I can say about Energy Transfer. For starters, its business is a bit more complex, with the partnership acting as the general partner for two other publicly traded partnerships. But the real story here requires a look back at previous events, including a 2020 distribution cut.

To be fair, that 2020 distribution cut was meant to allow the MLP to reset its business, using the freed-up cash to reduce leverage. It did that, and the distribution is growing again, with the new target being 3% to 5% annualized growth. However, that cut came during the coronavirus pandemic, when dividend investors would probably have preferred income consistency. That decision, while good for the business, was likely a big letdown for many unitholders.

Energy Transfer's other misstep is harder to quantify

Energy Transfer had another issue in 2016, when it agreed to buy pipeline peer Williams (NYSE: WMB) but then got cold feet. It was able to scuttle the deal, but there was a risk that consummating it as originally planned would require a dividend cut. During that uncertain period, Energy Transfer issued convertible securities that appear like they would have allowed insiders to avoid the impact of a dividend cut, if one were enacted.

The Williams deal was called off, and there was no dividend cut, so the convertibles turned into a non-issue. However, it left me with trust issues that were compounded by the 2020 dividend cut. For investors willing to look ahead and effectively overlook these two historical events, Energy Transfer's 6.5% yield will appear more attractive than Enterprise's 5.8%. To me, the extra yield wouldn't be enough to justify switching from a high-yield investment I can sleep well owning to one that risks keeping me up at night.

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.