Key Points
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Energy Transfer and Enterprise Products Partners are both designed to be slow-growing, boring businesses.
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They each have similar goals for distribution growth.
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Don’t jump on the higher-yielding option until you know more about both of these midstream giants.
Enterprise Products Partners (NYSE: EPD) and Energy Transfer (NYSE: ET) are two of the largest midstream businesses in North America. They provide services to energy companies, helping to move oil and natural gas around the world for a fee.
While the energy sector is generally pretty volatile, these two master limited partnerships (MLPs) have reliable, cash-generating businesses to back their lofty yields. Which one will be a better income choice for you?
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A high yield and a higher yield
Enterprise is offering investors a 6.3% distribution yield. Energy Transfer’s yield is an even higher 7.1%. If all you care about is yield, the easy answer here is to buy Energy Transfer. That’s not necessarily a bad call, given that both midstream master limited partnerships are likely to grow their distribution in the low-to-mid-single digits over time. Slow and boring is the goal today.
Image source: Getty Images.
That hasn’t always been for Energy Transfer. For example, Energy Transfer cut its distribution in half in 2020 during the coronavirus pandemic.
That was a difficult time for the energy sector as a whole. In 2016, during the last deep energy sector downturn, Energy Transfer had to scuttle a planned acquisition. The deal, which ended in a particularly ugly fashion, could have resulted in a dividend cut if it were consummated as originally planned.
If you need a reliable income source to help pay your bills, Energy Transfer might not be the best choice for you. The yield is higher for a reason, and owning it could leave you with sleepless nights during the next energy industry downturn.
Enterprise is boring and reliable
Enterprise is at the opposite end of the risk spectrum. It has long operated conservatively, with the best proof being its 27-year streak of annual distribution increases. That’s basically as long as the MLP has been public. Add in an investment-grade-rated balance sheet and distribution coverage of 1.7x, and it seems like more slow and reliable distribution growth is on tap.
For most dividend investors, Enterprise will likely be the better option. The extra income available from Energy Transfer is nice, but it comes with extra uncertainty that probably won’t be worth it for those with a more conservative investment appetite. If you have to worry about Energy Transfer’s distribution every time the energy sector hits a snag, how well are you likely to sleep at night?
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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.