Unlock a High-Yielding Dividend Stock with Strong Growth Potential
Investors seeking lucrative dividend stocks with high yields often overlook a crucial aspect: growth potential. Energy Transfer (NYSE: ET) stands out as a master limited partnership (MLP) that not only offers an attractive yield but also boasts a strong growth trajectory.
A High-Yielding Dividend Stock with a Twist
As an MLP, Energy Transfer pays out distributions, not dividends. This distinction comes with a tax benefit, as distributions have a return of capital component that is tax-deferred. While it requires some extra paperwork at tax time, this feature reduces the investment’s cost basis and isn’t taxed until the stock is sold.
Robust Distribution Coverage and Growth
Energy Transfer currently pays out a quarterly distribution of $0.3225, yielding 6.5%. The distribution is well-covered by its distributable cash flow (DCF), with a coverage ratio of 1.8 times. The company also allocates funds to growth projects, with a forecast of $2.8 billion to $3 billion in spending for 2024.
Predictable Cash Flows and a Solid Balance Sheet
About 90% of Energy Transfer’s business comes from fee-based contracts, providing a high degree of predictability. The company has also improved its balance sheet, with leverage now in the lower half of its targeted range. It plans to grow its distribution by 3% to 5% annually and buy back stock once its leverage target is achieved.
Growth Opportunities Abound
Energy Transfer owns one of the largest integrated midstream systems in the U.S., presenting numerous expansion opportunities. The company has received significant interest from power plants and data centers seeking connections to its pipelines, which could consume an aggregate of 16 billion cubic feet of natural gas daily. A new $2.7 billion natural gas pipeline project will support power plant and data center growth in Texas.
Attractive Valuation and Strong Growth Prospects
Energy Transfer trades at an attractive valuation, with an EV-to-EBITDA ratio of 8.4 times 2024 analyst estimates. This is one of the lowest among midstream MLPs, despite strong growth prospects. Analysts project the company will produce nearly $16.9 billion in EBITDA in 2026, up from $15.9 billion in 2024.
A Compelling Investment Opportunity
Energy Transfer offers a unique combination of a high yield, distribution growth, EBITDA growth, and an attractive valuation. With its strong growth potential and predictable cash flows, it’s an attractive option for investors seeking a high-yielding dividend stock.
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