Energy Transfer (ET), a leading U.S. midstream pipeline operator, stands out in the energy sector with its highly attractive distribution yield exceeding 7.5%. While ET may seem unremarkable, its stock price has surged 165% over the past five years, delivering a total return (including reinvested distributions) of 291%. This significantly outpaces the S&P 500’s 89% price gain and 104% total return over the same period.
Despite these market-beating returns, ET remains a compelling long-term holding for investors seeking both stable growth and inflation hedging, for the following reasons:
However, for investors seeking even higher income streams, ET might not be the optimal choice. Fellow Master Limited Partnerships (MLPs) Plains All American Pipeline (PAA) and Western Midstream Partners (WES) offer higher distribution yields (8.5% for PAA, 9.5% for WES), backed by similarly strong financial profiles.
Following the pending sale of its Canadian NGL business, approximately 85% of Plains All American Pipeline’s earnings come from fixed fees on volumes moving through its network – comparable to ET’s roughly 90%. Furthermore, the oil pipeline company expects its distribution coverage ratio to reach 1.75x this year and reported a Q2 leverage ratio of 3.3x, both metrics more favorable than ET’s. PAA plans to increase its distribution by approximately 10% annually until it achieves its target coverage ratio of 1.6x, after which growth will align with cash flow. This projected pace is faster than ET’s targeted annual distribution growth of 3% to 5%.
Western Midstream derives most of its earnings from fee-based contracts. It anticipates generating $1.3 billion to $1.5 billion in free cash flow this year, sufficient to cover its generous distribution and maintenance/growth capital expenditures. The company maintains a leverage ratio below 3.0x and plans to acquire Aris Water Solutions in a $1.5 billion cash-and-stock deal. Western Midstream targets low- to mid-single-digit annual distribution growth.
