When you look at a high-yield investment opportunity you need to look at the business behind the yield. After all, a yield is only as reliable as the business that supports it. If you have honed in on Energy Transfer (NYSE: ET) and its 6.7% distribution yield, you might want to instead consider Enterprise Products Partners (NYSE: EPD) and its slightly lower 6.4% yield. Here’s why.
There are two specific examples that should lead income investors to avoid Energy Transfer. The first happened in 2020, when the energy sector was in a deep downturn. That downturn was understandable, given that the coronavirus pandemic was raging and economic activity around the world had come to a virtual halt. So, in some ways, it makes sense that, out of caution, Energy Transfer cut its distribution from $1.22 per unit per quarter to $0.61, a 50% reduction. However, if you were a unitholder expecting to live off of the income your portfolio generated, a cut that large would have left a huge hole in your budget.
Are You Missing The Morning Scoop? Wake up with Breakfast news in your inbox every market day. Sign Up For Free »
The next problem dates back to the 2016 energy industry downturn. That was when Energy Transfer agreed to buy its pipeline peer Williams Companies (NYSE: WMB) but then, because of the broader industry weakness at the time, backed out of the deal. An odd twist was Energy Transfer’s decision to sell convertible securities, a large portion of which went to the then-CEO. Energy Transfer warned that completing the merger with Williams would risk a dividend cut, but the convertible securities would have, effectively, protected the CEO from being adversely affected by that cut. In the end, the deal was scuttled and Energy Transfer ended up having to pay nearly $500 million to Williams because of its actions, money that really comes out of unitholders’ pockets. It was a complicated affair, but it is pretty clear that when the chips are down in the energy sector, Energy Transfer unitholders have some cause to wonder if they are going to be top of mind.
Although Enterprise Products Partners’ yield is slightly lower than that of Energy Transfer, Enterprise has increased its distribution year in and year out for 26 consecutive years. That includes years like 2020 and 2016 when investors in Energy Transfer either experienced a cut or had to be concerned about the decisions being made by management and the board on that front.
