Investors are always on the search for stocks that pay generous dividends and have high yields. Unfortunately, that alone does not always make a great investment. That's why it's nice when you can find a stock not only with a high yield, but one that is also able to grow its dividend and business.
That's why Energy Transfer (ET -1.57%) is my favorite dividend stock to invest in at this time. Let's look at three reasons why I think the stock might be worth a $1,000 (or more) investment if you have cash available that isn't needed for monthly bills, an emergency fund, or to pay off short-term debt.
1. Energy Transfer has a well-covered and growing distribution
As a master limited partnership (MLP), Energy Transfer technically pays out a distribution, not a dividend. The difference between the two is tax-related, as distributions have a return of capital component that is tax-deferred. While it involves a little extra paperwork come tax time, this part of the distribution reduces an investment's cost basis and is not taxed until the stock is sold, which is a nice added bonus.
Energy Transfer currently pays out a quarterly distribution of $0.3225, which is good for a forward yield of 6.5%. The distribution is well covered by its distributable cash flow (DCF), which is its operating cash flow minus maintenance capital expenditures (capex). Last quarter, the company paid out $1.1 billion in distributions while generating $2 billion in DCF, which is good for a coverage ratio of 1.8 times. The company spent another $724 million on growth projects, so it had cash in excess of total capex and distributions of about $160 million.
While Energy Transfer does have a portion of its business that is exposed to commodity spreads and/or prices, about 90% is from fee-based contracts, which gives it a lot of predictability. It's also nicely improved its balance sheet over the past few years so that its leverage is now in the lower half of its targeted 4 times to 4.5 times range.
It is looking to grow its distribution by 3% to 5% a year moving forward. Meanwhile, it plans to buy back stock once its leverage target is achieved.
Image source: Getty Images.
2. Energy Transfer has growth opportunities
Energy Transfer is not just about its distribution; the company also has solid growth opportunities ahead. It owns one of the largest integrated midstream systems in the U.S., which presents a lot of expansion opportunities. For 2024, it forecast spending between $2.8 billion and $3 billion on growth projects. In the past, it has discussed spending between $2 billion and $3 billion on growth projects, but it recently bumped up its outlook to between $2.5 billion and $3.5 billion given the opportunities it is seeing.
Midstream companies typically look for unlevered project build rates of at least six to eight times, which means they would recoup their investment within six to eight years. As such, $3 billion a year in growth projects would add between $375 million and $500 million a year in additional EBITDA once these projects are fully ramped.
Meanwhile, the company has been receiving a lot of inbound interest related to increasing power needs stemming from artificial intelligence. On its last earnings call, it said it took calls from approximately 45 power plants it didn't serve and 40 prospective data centers about making connections to its pipelines that could consume an aggregate of 16 billion cubic feet a day in natural gas. Meanwhile, following its earnings call, it announced the go-ahead of a new $2.7 billion natural gas pipeline to take gas out of the Permian to nearby markets that would help support power plant and data center growth in Texas.
With numerous natural gas opportunities now emerging, Energy Transfer not only has a nice growth runway, but it should also be able to get very good returns on its projects given the strong demand environment. Essentially, it should be able to pick the projects that offer the best returns.
3. Energy Transfer has an attractive valuation
In addition to its robust and growing distribution and growth opportunities, Energy Transfer trades at an attractive valuation both historically and compared to peers. Enterprise value (EV)-to-EBITDA is typically the most common way to value pipeline stocks, as EV takes into account net debt used to build out the asset base, while EBITDA removes the non-cash depreciation costs of those assets since the project costs are already captured in the net debt.
On that basis, the company trades at an EV/EBITDA ratio of 8.4 times 2024 analyst estimates, which is one of the lowest among midstream MLPs.
MPLX EV to EBITDA (Forward) data by YCharts
Meanwhile, midstream MLPs as a group traded at an average of a 13.7 EV/EBITDA multiple between 2011 and 2016, so both Energy Transfer and MLPs in general are well below historical levels despite their renewed strong growth prospects. Analysts currently project Energy Transfer to produce nearly $16.9 billion in EBITDA in 2026, up from $15.9 billion in 2024, so this is a solid, growing company.
As such, Energy Transfer offers a nice combination of a high yield, distribution growth, EBITDA growth, and an attractive valuation, making it one of the best high-yield dividend stocks to invest $1,000 or more in today.
