Better Dividend Stock: Energy Transfer vs. Enterprise Products Partners

Energy Transfer (NYSE: ET) and Enterprise Products Partners (NYSE: EPD) are two of the largest energy midstream companies in the country. They generate stable cash flow, which provides them with ample funds to distribute to their investors. As a result, they currently offer appealing income yields. Energy Transfer's distribution yields 7.8%, while Enterprise Products Partners' payout is 6.9%, both well above the S&P 500's 1.2% yield.

Here's a look at which of these master limited partnerships (MLPs) is the better buy for income right now.

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A robust growth outlook

Energy Transfer generated $1.9 billion of cash during the third quarter. That was enough to cover its distribution to investors by about 1.7 times, allowing it to retain more than $750 million.

The MLP further backs its payout with a rock-solid balance sheet. Energy Transfer's leverage ratio is currently in the lower half of its 4.0-4.5 times target range. Its low payout ratio and leverage level have the MLP in the strongest financial position in its history.

Energy Transfer is using its ample financial flexibility to invest in expansion projects. It expects to fund $4.6 billion in growth capital projects this year and an additional $5 billion in 2026. The MLP has more capital projects lined up through the end of the decade. The largest is the $5.3 billion Desert Southwest Expansion project, which it aims to finish by the fourth quarter of 2029. These secured capital projects provide it with significant visibility into its growth over the next several years. They help support Energy Transfer's plan to increase its distribution by 3% to 5% per year.

Additionally, Energy Transfer has many more expansion projects in development. It's working on a large-scale liquified natural gas (LNG) export terminal, several projects to supply gas to data centers, and an expansion of a major oil pipeline. Securing these and other projects would further enhance its growth outlook.

Entering a new chapter

Enterprise Products Partners generated $1.8 billion of cash during the third quarter. That covered its distribution by 1.5 times, allowing the MLP to retain $635 million in cash.

One thing that's noteworthy about Enterprise Products Partners is that it pays out a higher percentage of its stable cash flow than Energy Transfer, yet it has a lower yield. That's because it trades at a higher valuation than Energy Transfer, which has one of the lowest valuations in the energy midstream sector at about nine times earnings (compared to the peer group average of 12 times earnings).

Enterprise Products Partners' higher valuation is due partially to its even stronger financial profile. The MLP has a low 3.3 times leverage ratio and the highest credit rating in the energy midstream sector (A-/A3). That provides it with greater financial flexibility and allows it to borrow money at lower rates.

The MLP is using its financial flexibility to invest in expansion projects. Enterprise Products Partners expects to invest about $4.5 billion this year and between $2.2 billion and $2.5 billion in 2026. The company is nearing the end of a multi-year capital investment phase that started in 2022. Once it completes its last large-scale capital project next year, the midstream company expects to produce significantly more free cash flow.

That will free Enterprise Products Partners up to return even more money to investors. It could increase its distribution growth rate (it has raised its payout by 3.8% over the past year) and repurchase more of its units. The MLP recently boosted its unit repurchase authorization from $2 billion to $5 billion. Enterprise Products Partners also has the flexibility to pursue acquisitions and additional growth capital projects as opportunities arise.

A clear winner

Energy Transfer and Enterprise Products Partners are both excellent options for income-seeking investors who are comfortable receiving the Schedule K-1 Federal Tax Forms that the MLPs send each year. However, Energy Transfer is the better dividend stock to buy right now. It trades at a lower valuation than Enterprise Products Partners, which gives it a higher yield. Additionally, it has greater visibility into its future growth prospects. As a result, it should provide investors with more income and has the potential to produce a higher total return in the coming years compared to Enterprise Products Partners.

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