In the realm of energy stocks today, Energy Transfer (NYSE: ET) emerges as a prominent option, offering investors a substantial 7.7% yield. This rate is notably appealing considering that the S&P 500 index, even after significant selling pressure, yields only about 1.3%, and the average yield for energy stocks stands at merely 3.1%.
Nonetheless, potential investors should examine Energy Transfer’s distribution history before purchasing shares in this Dallas-based pipeline company solely for its high yield. It may ultimately be more advantageous to consider an industry peer, Enbridge (NYSE: ENB).
Currently, Energy Transfer offers a notable 7.7% yield, surpassing the average and even higher than Enbridge’s 5.8% yield. For those focused purely on present yield figures, Energy Transfer appears advantageous. However, a review of the master limited partnership’s yield history reveals significant insights.
While Enbridge’s yield has fluctuated moderately over time, it has not experienced extreme fluctuations. Energy Transfer’s yield surged in both 2016 and 2020. This prompts the question, “Why?” The reasons are somewhat concerning.
In 2016, the energy sector faced challenges. Energy Transfer agreed to acquire Williams Companies (NYSE: WMB) but reconsidered swiftly. This turbulent period raised investor fears about a potential dividend cut due to the acquisition. Although the cut did not occur, it was evident that Energy Transfer made some concerning decisions during this time based on market reactions.
In 2020, amid pandemic-related uncertainty, Energy Transfer halved its distribution. Most dividend investors seek stable income streams, not those prone to reductions during tough times. Although the distribution has now increased beyond pre-cut levels, Energy Transfer disappointed investors precisely when reliable income was most needed.
Conversely, Enbridge boasts a stronger dividend history. While purchasing Energy Transfer might not be a grave error, it may not be the optimal choice for dividend investors who prioritize reliability. The Calgary-based company has consistently increased its dividend, in Canadian dollars, for 30 years.
Similar to Energy Transfer, Enbridge ranks among North America’s leading midstream companies. However, Enbridge’s operations include regulated natural gas utilities and a small, contract-driven clean energy business, contributing to approximately a quarter of its adjusted EBITDA. This diversification aids in stabilizing cash flows and reinforcing Enbridge’s growth prospects.
Additionally, Enbridge maintains an investment-grade rated balance sheet. When Energy Transfer reduced its distribution in 2020, the intent was debt reduction, indicating that the company had overextended itself and required adjustment. This situation partly stemmed from its growth-via-acquisition strategy. Notably, Enbridge, with a long history of acquisitions involving debt, has never resorted to a dividend cut.
For those whose primary objective is maximizing portfolio-generated income, Energy Transfer may initially appear superior to Enbridge. However, a high yield is only appealing if dividend reliability can be assured. Energy Transfer’s history suggests that such reliability may be questionable. Although it offers a lower yield, Enbridge has demonstrated a consistent and growing dividend commitment for three decades, making it likely a preferable choice for those prioritizing dependable income over the higher yield offered by Energy Transfer.
