Is Energy Transfer the All-American Dividend Stock for You? Consider This High-Yielder Instead.

Dividend investors are always trying to maximize yield, but that requires extra consideration on the risk front. A high yield that isn't backed by a reliable company could leave you in the lurch and, likely, at the worst possible time. This is why investors looking at Energy Transfer (NYSE: ET) and its lofty 7.5% distribution yield will probably be better off taking a little less yield and choosing Enterprise Products Partners (NYSE: EPD) instead. Here's why.

What do Energy Transfer and Enterprise Products Partners do?

Energy Transfer and Enterprise are two of the largest midstream companies in North America. They both hail from the United States and generate most of their business from the country.

The truth is, owning energy infrastructure assets like pipelines essentially forces these two businesses to be American at heart. After all, you can't move oil around the United States on a pipeline that gets built in Europe. That pipeline has to get built on U.S. soil.

Image source: Getty Images.

The midstream is actually the most boring segment of the overall energy sector. That's because businesses like Energy Transfer and Enterprise charge fees for the use of their assets. Although the oil, natural gas, and other products that flow through the system may have volatile prices, midstream companies don't really care about the price of what they move. They just care about the volume of product they move. The higher the volume, the higher the toll-like revenues they generate.

Given the importance of energy to the global economy, demand for oil and natural gas tends to remain fairly robust even when commodity prices are weak. Even recessions don't materially diminish demand, since the world would, literally, stop in its tracks without oil and natural gas. From this perspective, Energy Transfer and Enterprise Products Partners are on equal footing.

Energy Transfer has let investors down before

Here's the thing: Energy Transfer doesn't have the same history of treating its investors well as Enterprise does. That difference is why conservative income investors should be happy to trade down to Enterprise's 6.9% yield. The first big issue happened in 2016, during a time when oil prices were weak.

At that point, Energy Transfer agreed to buy peer Williams. It got cold feet, warning that completing the deal would require taking on too much debt and could also force a dividend cut. It was the right decision to scuttle the deal. The problem was the way in which it achieved that end.

The company sold convertible securities, with a huge portion going to the then-CEO. It appears that the convertible securities would have protected the CEO from the effect of a dividend cut, had a dividend cut been needed. In the end, Energy Transfer got out of the Williams deal, but that convertible decision should leave a bad taste in investors' mouths.

Then, in 2020, when the energy industry was hit hard by demand declines around the coronavirus pandemic, Energy Transfer cut its distribution. Again, the decision was probably the right one for the business, which used the freed-up cash to strengthen its balance sheet. But income investors took it on the chin, and that's the key takeaway here.

During the last two big energy industry downturns, when income investors were likely hoping for consistency, they had to worry about, and actually experience, income declines if they owned Energy Transfer.

Enterprise Products Partners didn't cut its distribution in 2016 or in 2020. It didn't put out any warnings that such an event was possible. It just operated its reliable cash flow generating business. Along the way, it delivered distribution increases. At this point, the U.S. midstream giant has increased its distribution for 26 consecutive years. While trust might be a troubling issue with Energy Transfer, it isn't with Enterprise Products Partners.

More reasons to like Enterprise Products Partners

The long streak of putting unitholders first is a core reason to like Enterprise Products Partners, but it isn't the only reason. Other good reasons to like this midstream giant are its investment grade rated balance sheet, and the 1.7x over that its distributable cash flow covered its distribution in 2024.

These are both signs of management's commitment, since they mean there's a lot of leeway before a distribution cut would be in the cards at Enterprise Products Partners. Put it all together, and most investors will probably be better off with all-American Enterprise over all-American Energy Transfer.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.