Is Energy Transfer Stock a Buy Now for Income-Focused Portfolios?

If you are an income-focused investor, you'll be attracted to Energy Transfer's (NYSE: ET) lofty 7.3% distribution yield. Add in a plan for 3% to 5% annual distribution growth, and you get to roughly 10%, which is the return that most investors expect from stocks over time. Here are some more reasons to be attracted to Energy Transfer and one that may still keep you away.

Energy Transfer has a reliable business

The core story with Energy Transfer is that it operates a large North American midstream business. It basically helps to move oil and natural gas around the world. The master limited partnership (MLP) uses a toll taker approach, charging fees for the use of its energy infrastructure assets.

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That generally leads to reliable cash flows throughout the energy cycle. The volume of energy moving through its system is more important than the prices of oil and natural gas. Given the importance of energy to modern society, volumes tend to be pretty robust most of the time. Through the first nine months of 2025, Energy Transfer's distributable cash flow covered its distribution by a very strong 1.8x.

Looking forward, Energy Transfer has $5 billion in capital spending plans for 2026 to keep its business growing. Looking further out, management has projects that extend to 2029. That's what backs its plan for 3% to 5% annual distribution growth.

A worrying misstep or preparing for the future?

There's one small wrinkle that may worry more conservative income investors. Energy Transfer cut its distribution by 50% in 2020 during the energy downturn that accompanied the coronavirus pandemic. Management explained that the purpose of the cut was to strengthen the balance sheet. That's a good thing, of course. However, if you had been counting on those distributions to cover living expenses, you would have been very unhappy and might have sold the MLP.

To be fair, leverage has been reduced, and the distribution is growing again. In fact, it is higher than it was prior to the cut. Still, the decision to reduce the distribution may weigh heavily on investors who need their income to pay for living expenses.

Interesting, but not for everyone

There are good reasons to like Energy Transfer, and there is a good reason to look elsewhere. In fact, the midstream sector is filled with high-yielders, and some, like Enterprise Products Partners and Enbridge, have decades of dividend growth behind them. You may have to accept lower yields, but the trade-off may be what lets you sleep well at night during the next energy downturn.

Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.