Energy Transfer: The 8% Dividend Stock to Own
Key Points
Energy Transfer generates very stable cash flows.
The MLP also has a conservative financial profile.
It has the financial flexibility to grow its operations and high-yielding distribution.
- 10 stocks we like better than Energy Transfer ›
A high dividend yield is often a warning sign that a company's dividend isn't sustainable for much longer. Given that logic, Energy Transfer's (NYSE: ET) 8%-yielding dividend might seem a bit suspect at first glance. However, a closer look at the master limited partnership (MLP) shows that its big-time payout is on rock-solid ground.
Here's why Energy Transfer is a rare 8%-yielding dividend stock that's worth owning.
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This high-yielding payout is very sustainable
Energy Transfer operates a diversified energy midstream platform. These assets generate very stable cash flow as fee-based structures supply 90% of the MLP's earnings.
Despite what its 8% yield might seem to suggest, the company pays out a conservative percentage of its steady income to investors. Energy Transfer produced nearly $6.2 billion of distributable cash flow through the third quarter, which is money the MLP could have distributed to investors. It has paid $3.4 billion in distributions so far this year, putting its coverage ratio at a comfortable 1.8 times. That allowed it to retain roughly $2.8 billion in cash.
Energy Transfer also has a strong balance sheet. Its leverage ratio is now in the lower half of its 4.0-4.5 times target range. With a high distribution coverage ratio and low leverage level, the MLP is in the strongest financial position in its history.
The company is using its financial flexibility to invest in expanding its midstream portfolio. It's funding $4.6 billion of growth capital projects this year and expects to spend another $5 billion in 2026. It has projects underway that should come online through the end of the decade.
Energy Transfer's strong financial profile and visible growth prospects support its plans to increase its 8%-yielding payout by 3% to 5% per year. This high-yielding and growing income stream makes the MLP worth owning for those comfortable with receiving the Schedule K-1 Federal Tax Form it sends each year.
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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.
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