There are a lot of things about Energy Transfer (NYSE: ET) stock that an income-focused investor will find attractive. The big one is the roughly 6.8% yield that is backed by a growing distribution. But, as with every dividend stock, there’s more to the story than just the dividend yield. A little backstory will help you decide whether or not Energy Transfer is a stock you want to buy now.
Energy Transfer is a little more complex than most midstream companies. Its core is straightforward. It owns energy infrastructure, like pipelines, that helps to move oil and natural gas around the world. This is largely a fee-driven business, so the volume of oil and gas passing through its system is more important than the prices of those commodities.
That said, the master limited partnership (MLP) also acts as the general partner for other publicly traded MLPs. And it owns positions in those MLPs.
One business it works with is Sunoco LP (NYSE: SUN), which delivers refined products to resellers. That sounds fancy, but the main business is really just delivering gasoline to gas stations. It has, however, been expanding into more pipeline assets for diversification. The second business partner is USA Compression Partners (NYSE: USAC), which owns the equipment that adds pressure to pipelines to increase the flow of the commodities in the pipeline.
In addition to those two public entities, Energy Transfer is also invested in two liquified natural gas operations.
As you can see, there’s a lot going on here. For income-focused investors who like to keep things simple, Energy Transfer probably won’t be a good fit. A peer like Enterprise Products Partners (NYSE: EPD) has a much more straightforward business model.
The real problem with buying Energy Transfer now isn’t what its business is today. It’s what the business has done in the past. For example, the dividend has been growing since 2021. In fact, it has more than doubled since the start of 2021. That sounds really good until you realize that the dividend was cut in half in 2020.
That was a tough time for the energy sector, given the drop in oil prices during the height of the coronavirus pandemic. The price of West Texas Intermediate Crude, a key U.S. oil benchmark, actually fell below zero at one point during that highly uncertain period. So, in some ways, it makes sense that Energy Transfer cut its distribution in an attempt to ensure it had enough liquidity to muddle through whatever situation came out of the pandemic. However, it’s worth noting that Enterprise Products Partners not only increased its distribution in 2020, it has a 26-year-long streak of annual increases under its belt. If you’re looking for a reliable dividend stock, Energy Transfer’s history suggests that you might be better off elsewhere.