The allure of high-yield dividend stocks is undeniable, but income investors should prioritize the reliability of the underlying business. When evaluating Energy Transfer (ET) and its enticing 6.7% distribution yield, a closer look reveals potential risks. This article compares Energy Transfer’s dividend history with that of Enterprise Products Partners (EPD), highlighting why EPD’s slightly lower 6.4% yield might be a more prudent choice for income-focused investors.
Energy Transfer’s Dividend History: Cause for Concern
Two specific instances raise concerns about Energy Transfer’s commitment to consistent dividend payouts. First, during the 2020 energy sector downturn triggered by the COVID-19 pandemic, Energy Transfer slashed its distribution by 50%, from $1.22 to $0.61 per unit per quarter. While understandable given the circumstances, such a drastic cut would significantly impact income-dependent investors.
Second, during the 2016 energy industry downturn, Energy Transfer’s attempted acquisition of Williams Companies (WMB) and subsequent withdrawal raised red flags. The company’s decision to sell convertible securities, largely to its then-CEO, while warning of a potential dividend cut if the merger proceeded, suggested a prioritization of executive interests over unitholder returns. Ultimately, the failed deal cost Energy Transfer nearly $500 million, a burden borne by unitholders. These incidents cast doubt on Energy Transfer’s commitment to dividend stability during challenging times.
Enterprise Products Partners: A History of Dividend Growth
In contrast, Enterprise Products Partners boasts a remarkable 26-year history of consecutive annual dividend increases. This unwavering commitment to distribution growth, even during industry downturns in 2016 and 2020, underscores EPD’s reliability as an income investment.
Beyond dividend growth, Enterprise Products Partners maintains a strong investment-grade balance sheet and a robust distribution coverage ratio of 1.7 times. This substantial coverage provides a significant buffer against potential dividend cuts in the face of adversity.
EPD’s Financial Strength and Unitholder-Friendly Practices
Enterprise’s high distribution coverage is a deliberate management decision reflecting a shift towards self-funding capital investment projects. By reducing reliance on unit issuance for growth spending, EPD minimizes potential dilution for unitholders. This strategic move, along with the company’s commitment to acquisitions that generate immediate cash flow, further strengthens its financial position and benefits unitholders.
Choosing the More Reliable Dividend Payer
While both Energy Transfer and Enterprise Products Partners operate in the midstream energy sector, their approaches to dividend payouts differ significantly. Enterprise Products Partners’ consistent dividend growth, robust financial strength, and unitholder-centric practices make it a more reliable income investment. Despite a slightly lower yield, EPD offers peace of mind for investors seeking dependable income streams. For those prioritizing long-term dividend stability and growth, Enterprise Products Partners emerges as the clear winner.
