Is It Too Late to Buy Energy Transfer After a 25% Rally? History Has a Clear Answer.

Whether it's cases of fear of missing out (FOMO), strong conviction in specific stocks or sectors, or just good old-fashioned commitment to long-term investing, many of today's retail investors aren't spooked about stocks after significant rallies.

That's relevant in discussing Energy Transfer LP (TXSE: ET), a beloved high-dividend pipeline stock that's surged 25% year to date. With a dividend yield of 6.7%, Energy Transfer is undoubtedly tempting to a broad swath of equity income investors. Still, some may rightly be wondering if they're late to the party given the stock's scorching hot run this year.

Energy Transfer stock is hot, but that's not a reason to avoid it. Image source: Getty Images.

There's no surefire way to know what the future has in store for Energy Transfer, and that's true of any stock. Marty McFly can't fire up the DeLorean and tell us how this energy stock will shape next week, next month, or in 2027. However, Energy Transfer's post-rally history may be instructive.

A run, then a rest

Stocks don't move up in straight lines. Many take breathers following extended rallies. That's been the case with Energy Transfer this year. The war in Iran sent energy prices and equities soaring in the first quarter, and Energy Transfer participated in the fun, notching a mostly smooth move higher.

Those good times extended into the second quarter, a period in which Energy Transfer experienced pullbacks in consecutive months. Still, all those modest dips were bought, and the stock continued to grind higher. That recent history is pertinent today because as of Wednesday, Oct. 21, this pipeline stock retreated 7.8% from its 52-week high.

Investors eyeballing Energy Transfer today should keep a couple of points in mind. First, a decline of 7.8% from a recent high isn't even a correction (that'd be a 10% drop), let alone a full-fledged bear market. Second, when strongly trending stocks pull back, those retreats can range from 5% to 15% and still be considered "healthy" or "normal."

Shares of Energy Transfer are up 185.1% over the past five years, confirming strength. Not only that, but over that period, the stock trounced the Alerian MLP Infrastructure Index, of which it's a member, and all of its dips proved to be buying opportunities.

The dividend buffer

With Energy Transfer, the big source of allure is income. Its 6.7% dividend yield easily tops the 10-year Treasury yield, and, through small but steady increases, the payout has grown in recent years.

Energy Transfer's status as a dividend-paying stock, particularly one with a growing payout, is important. If the shares were dragged lower by a broader market, not stock-specific, calamity, the pullback may be less severe. After all, dividend payers historically prove sturdier than their non-dividend-paying counterparts during rough markets.

Using history as a guide, Energy Transfer's recent behavior is normal, and the recent dip could prove to be a buying opportunity for patient long-term investors.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.