Is This Texas-Based Energy Company a No-Brainer Buy for Dividend Investors?

Based in Dallas, Texas, Energy Transfer (NYSE: ET) has a very attractive 7.3% distribution yield. That is likely to attract dividend investors looking to maximize the income their portfolios generate. However, before you buy, you'll want to know a few facts about the business backing that yield.

Energy Transfer is a little complex

Energy Transfer is one of the largest midstream operators in North America. It basically owns energy infrastructure, such as pipelines, that help move oil and natural gas around the world. It largely charges fees for the use of its assets, thereby generating reliable cash flows throughout the energy cycle. Demand for its services, which tends to remain strong even when oil prices are low, is more important than the price of the commodities Energy Transfer is moving through its system.

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That said, there's a small wrinkle. Energy Transfer also acts as the general partner for two other publicly traded master limited partnerships: Sunoco (NYSE: SUN) and USA Compression Partners (NYSE: USAC). Energy Transfer generates fee income for managing those two businesses, but it adds a layer of complexity that some investors may find undesirable. It wouldn't be difficult to imagine these relationships turning into a management distraction.

Indeed, you can buy competitor Enterprise Products Partners (NYSE: EPD) and avoid that complexity. Enterprise's yield is slightly lower, at 6.5%, but simpler could be better if you want to sleep well at night.

What about the distribution cut?

Another big difference with Enterprise Product Partners is the fact that it has increased its distribution annually for 27 years. That's basically as long as the master limited partnership (MLP) has been publicly traded. If you need your income to pay for living expenses, Enterprise should be high up on your wish list.

Energy Transfer cut its distribution in 2020. The MLP used the savings to strengthen its balance sheet, which is good. And the distribution is growing again, with a target of 3% to 5% annual growth going forward. However, if you were counting on the distribution from this high-yielder in 2020, you would have been sorely disappointed by that cut.

At the end of the day, Energy Transfer is not a no-brainer choice. Its high yield comes with risks that you need to understand and be willing to shoulder. For conservative dividend investors, Enterprise is probably a better choice despite its slightly lower yield. Sleeping well at night may be well worth the lost income.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.