Why I Can't Stop Buying Energy Transfer These Days

Energy Transfer (NYSE: ET) is already one of my largest sources of passive income. Despite that, I recently added to my position in the master limited partnership (MLP) again.

Here's why I can't stop buying the pipeline stock.

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A high-quality, high-yielding income stream

Energy Transfer currently has a distribution yield approaching 7.5%. That's several times higher than the S&P 500's dividend yield of around 1.1%. That high yield makes the MLP (which sends a Schedule K-1 Federal tax form each year) ideal for generating passive income.

While high-yielding investments can have a higher risk profile, that's not the case with Energy Transfer. The MLP is currently in the strongest financial position in its history. It has distributed about 50% of its annual cash flows to investors over the past three years (about 90% of which come from stable fee-based sources), enabling it to retain billions of dollars to expand its operations and maintain a strong balance sheet. The company's leverage ratio is currently within its target range of 4.0-4.5 times, providing it with additional financial flexibility.

The raises keep coming

Energy Transfer recently raised its lucrative cash distribution again. It has increased its payout each quarter for the past several years and has delivered more than 3% distribution growth over the past year. That's within its long-term target of 3% to 5% annual distribution growth.

The MLP should have plenty of fuel to continue increasing its high-yielding distribution. Its earnings should rise 7% to 10% this year due to the ramp-up and expected completion of several expansion projects. Meanwhile, the company is investing $5 billion to $5.5 billion into organic expansion projects this year. That's part of a multi-year capital spending program that includes projects scheduled to come online through the end of the decade (led by the $5.6 billion Transwestern Pipeline expansion project in the fourth quarter of 2029).

Energy Transfer is pursuing multiple additional expansion projects, including numerous opportunities to grow its extensive gas infrastructure platform. Strong gas demand from power producers and AI data centers is creating incremental investment opportunities to expand its gas network.

High income and growth potential

Energy Transfer already provides me with lots of passive income. I continue adding to my position, which should provide even more income to my portfolio, especially as the MLP continues to increase its distribution. In addition to income, Energy Transfer has robust growth on the horizon. That drives my view that Energy Transfer can deliver powerful total returns over the next several years, which is why I can't stop adding to my position.

Matt DiLallo has positions in Energy Transfer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.