Why I Wouldn't Touch This 6.5% Yielder, Even at a Discount

Energy Transfer (NYSE: ET) has a lofty 6.5% distribution yield. That's actually higher than peers like Enterprise Products Partners (NYSE: EPD) and Enbridge (NYSE: ENB) that offer 5.6% and 5%, respectively. Even though Energy Transfer trades at a discount to these peers, I wouldn't buy it. Here's why.

Energy Transfer is more complicated

Enterprise Products Partners is a very straightforward business, operating a portfolio of midstream energy assets. It charges customers fees for the use of its assets, generating reliable cash flows to support its yield. Enbridge, which I own, is a little more complex. It owns midstream assets, regulated natural gas utilities, and renewable power assets. However, all of these businesses are fairly simple to understand and generate reliable cash flows to support the company's attractive yield.

Image source: Getty Images.

Energy Transfer owns midstream assets and also serves as the managing partner for two publicly traded master limited partnerships (MLPs), Sunoco (NYSE: SUN) and USA Compression Partners (NYSE: USAC). So there are really three different businesses in the mix for investors to monitor. I don't see the need to take on the extra complexity, especially when Energy Transfer has done things that leave me with trust issues.

Energy Transfer: Trust is the linchpin issue

If the complexity of Energy Transfer's business isn't enough to keep you away, then consider two more facts. In 2006, Energy Transfer agreed to buy peer Williams (NYSE: WMB). It got cold feet and, in its effort to scuttle the deal, issued convertibles that appeared to protect the CEO from a dividend cut. The merger was called off, and the feared dividend cut didn't happen, but that move leaves me with a big question mark about the MLP's commitment to unitholders.

Then there was the 50% distribution cut in 2020, during the energy downturn that accompanied the COVID pandemic. The move was made to focus on debt reduction, and the distribution is growing again. But if you were counting on those distributions to pay your living expenses, you got a rude awakening right when you probably needed those distributions most. Neither Enterprise nor Enbridge cut their disbursements, with Enterprise increasing its distribution for 27 consecutive years and Enbridge increasing its dividend for 31 years.

Energy Transfer is charting a new path

To be fair, Energy Transfer has reduced debt and has started down a more conservative business path. The goal is now slow-and-steady growth, with a distribution growth target of 3% to 5% per year. It basically wants to be more like Enterprise and Enbridge. Given the history here, however, I'd rather just own Enterprise or Enbridge even though Energy Transfer has a higher yield.

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.