Key Points
Energy Transfer has a high dividend yield.
The MLP's high-yielding payout is on a very sustainable foundation.
It should continue growing its payout in the future.
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Energy Transfer (NYSE: ET) currently has a big-time dividend yield. The master limited partnership (MLP) yields nearly 7.2%, several times higher than the S&P 500's dividend yield (1.2%). As a result, you can generate more income from every dollar you invest in the pipeline company.
Here's how much you'd need to invest in the MLP to earn $500 a month.
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Energy Transfer currently pays quarterly distributions of $0.335 per unit ($1.34 annually). The company has increased its distribution by 3% over the past year.
At the current rate, you'd need to hold 4,478 units of the MLP to generate $6,000 of annual income ($500 monthly), which you'll receive in quarterly installments of around $1,500. You'd need to invest nearly $84,000 into the MLP at its recent price point ($18.75 per unit) to achieve your targeted income level.
That's significantly less than you'd need to invest to generate $500 a month from a lower-yielding investment. For example, you'd need to invest nearly $522,000 into an S&P 500 index fund to produce $500 of monthly dividend income.
While higher-yielding dividend stocks often have a higher risk profile, that's not the case with Energy Transfer. The MLP, which sends investors a Schedule K-1 Federal tax form each year, generates very stable cash flow (90% from predictable fee-based sources). Meanwhile, it only pays out around 50% of its steady cash flow in dividends, retaining the rest to invest in expansion projects. Energy Transfer also has a strong balance sheet, giving it additional investment capacity.
The MLP's growth capital spending will be over $5 billion this year, and it has projects lined up to enter commercial service through the end of the decade. This visible growth supports the MLP's plans to increase its already high-yielding distribution by 3% to 5% each year.
Energy Transfer's combination of financial strength and visible growth makes it an ideal income investment.
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Matt DiLallo has positions in Energy Transfer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
