Energy Transfer: The 8%-Yielding Dividend Stock to Own
Key Points
The stock’s 2025 struggles may be presenting investors with a buying opportunity.
The 8% dividend yield is eye-catching and, more importantly, sustainable.
New projects could be catalysts for long-term growth.
- 10 stocks we like better than Energy Transfer ›
While the group's returns are positive, energy is one of seven sectors lagging the S&P 500 so far this year. Some stocks have been hit worse than others.
Consider midstream operator Energy Transfer (NYSE: ET). That stock is off nearly 17% year to date as I write this, a decline that's pushed its dividend yield to roughly 8%. Combine that decline at a time of broader market strength with that jaw-dropping yield, and it's reasonable that some investors may be looking at Energy Transfer as a potential yield trap. But I don't think it is.
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Safe dividend; bright outlook
The company recently announced the halt of its burdensome Lake Charles liquefied natural gas (LNG) project, potentially freeing up resources that can be allocated to the higher-potential Desert Southwest expansion plan.
The company also has steady adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) growth and puts forth efforts to manage leverage effectively.
The pipeline operator's desired net-debt-to-EBITDA ratio of 4-4.5 is a priority because it aligns with peers while mitigating the risk of losing its investment-grade credit rating. The dividend is further supported by expectations that Energy Transfer's long-term financials will improve as new projects come online, potentially bolstering free-cash-flow (FCF) generation in the process.
Looking further out, it may not be fully appreciated by investors that Energy Transfer has some exposure to soaring data center demand. The company states that the Desert Southwest expansion is rooted in meeting "additional customer demand," and data centers could be part of that equation.
When it comes to data centers, at least two factors are widely known. First, hyperscalers are seeking to source natural gas from basin projects before it reaches the open market. Second, some of the most gas-rich basins are located in Texas, which is also a growing hub for data centers. Those factors are important in discussing Entergy Transfer because the company is the largest intrastate pipeline operator in the Lone Star State so it's logical to assume it will benefit from data-center-driven demand.
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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.
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