Could Buying Energy Transfer Stock Today Set You Up for Life?

Most investors examining Energy Transfer (NYSE: ET) today are likely excited by the approximately 8% distribution yield of the master limited partnership (MLP). That's a lot of income if you are trying to live off dividends in retirement.

Just don't get so enamored of the yield that you overlook the full story. Here's why Energy Transfer may not be the stock to set you up for a lifetime of reliable income -- but one of its industry peers could be.

What does Energy Transfer do?

Energy Transfer operates in a sector known for its high volatility. Oil and natural gas prices can fluctuate dramatically and rapidly in response to factors such as supply and demand, geopolitical conflicts, and the economy.

Except that the energy sector isn't one monolithic business. It is actually broken down into three segments.

Image source: Getty Images.

Energy producers operate in what is known as the upstream segment. Companies that use the upstream output to produce chemicals and refined products, such as gasoline, operate in the downstream segment. Both of these are commodity-driven businesses, with the downstream facing commodity volatility on both the input and output sides of the business.

Energy Transfer operates in what is known as the midstream; this segment connects the upstream to the downstream and the rest of the world. Energy Transfer collects fees for the use of the energy infrastructure it owns, such as pipelines.

Demand for energy is more important than the price of the commodities flowing through its system. Given the importance of oil and natural gas to the world's economy, volumes tend to remain fairly robust even during economic downturns, such as recessions.

From this perspective, Energy Transfer's business is attractive. It gets even more attractive when you see that the MLP produced cash flow that covered its distribution by 1.8 times through the first nine months of 2025. That's strong support for the distribution and gives investors a good reason to believe that Energy Transfer could set them up with a lifetime of reliable income.

Energy Transfer isn't the only midstream giant

Energy Transfer's business isn't unique; there are other midstream businesses that are just as well-positioned. For example, Enterprise Products Partners (NYSE: EPD) has a nearly 7% distribution yield and an investment-grade balance sheet, and its distribution is also well covered. Despite the similarities, though, don't just assume the higher yield is the better choice.

The distributions paid by Energy Transfer and Enterprise Products Partners are approved by each one's board of directors, just like at any other company. Enterprise has increased its distribution annually for 27 consecutive years. Energy Transfer's distribution has increased for four years, if you include 2025, which isn't over yet. Its distribution was cut in half in 2020 so the MLP could focus on strengthening its finances.

When the coronavirus pandemic was raging in 2020, there was a huge amount of uncertainty, including in the energy sector. So it isn't unreasonable that Energy Transfer cut its distribution. But that cut came right when most investors would probably have been hoping for continuity.

Enterprise, by contrast, stuck by its distribution through that difficult period and many that came before it, too. If you are a conservative dividend investor, sacrificing a little yield here might be a good strategy.

Energy Transfer has let investors down before

And Energy Transfer's distribution cut in 2020 wasn't the only time it made a troubling call. In 2016, the company inked a deal to acquire the Williams Companies but then backed out of it because its industry was in a rough state.

The effort to scuttle the deal included issuing convertible securities, a significant portion of which went to the CEO at the time. Those convertible securities would likely have protected the holders from the impact of a dividend cut, which Energy Transfer warned was a possibility if the Williams deal went through.

That deal was called off, so no material harm was done, and the dividend was not cut. However, the 2020 distribution cut, combined with the 2016 situation with Williams, should likely leave investors with trust issues.

There are no similar trust issues with Enterprise Products Partners. That's why Enterprise is probably a better option for conservative investors seeking to set themselves up with a lifetime of reliable income.

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.