Sarah Travers
Energy Transfer (ET) has emerged as a top choice for investors seeking substantial passive income, particularly those looking for consistent and rising returns. Known for its high-yielding distribution, Energy Transfer has become one of the largest income producers in investment portfolios like the one held by the author. Over time, the company has demonstrated resilience, financial growth, and a commitment to rewarding its investors, making it a strong candidate for long-term passive income generation.
A Rocky Start and Strong Recovery
The author’s investment journey with Energy Transfer began in early 2020, a time of uncertainty as the COVID-19 pandemic unfolded. The timing was unfortunate, as the company made the tough decision to slash its distribution by half to preserve cash. While this was a setback for investors in the short term, the decision paid off over time. Energy Transfer used the extra cash to strengthen its financial position, significantly reducing its debt and lowering its leverage ratio. This careful financial management allowed the company to fortify its balance sheet, bringing its leverage ratio within a comfortable target range of 4.0 to 4.5 times.
The improved financial foundation has given Energy Transfer the flexibility it needs to continue rewarding investors, reinstating its payout to a level higher than it was before the pandemic. Additionally, the company has capitalized on strategic opportunities in the midstream sector, closing a series of acquisitions that have further boosted its performance. One of the most notable was its $7.1 billion acquisition of Crestwood Equity Partners, which consolidated the author’s position into an even stronger income-generating investment.
A Stable and Diversified Income Generator
Energy Transfer’s ability to produce stable cash flow is one of the key reasons it stands out as an elite income investment. Roughly 90% of its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) comes from reliable, fee-based sources. Furthermore, the company’s diversified asset mix helps reduce risks, making it a safer choice for income-focused investors.
The company’s conservative approach to distributing cash to investors is another significant factor contributing to its appeal. Energy Transfer generates approximately $8.5 billion in distributable cash flow annually, with $4.5 billion allocated to investor distributions. This equates to a modest payout ratio of 53%, which leaves the company with around $4 billion each year to invest in growth projects, further reduce its debt, and repurchase units. This financial discipline allows Energy Transfer to continue growing while maintaining the strength of its balance sheet.
Growth-Focused Acquisitions and Capital Investments
Energy Transfer’s long-term growth strategy is further supported by its capital investments. This year alone, the company has budgeted $3.1 billion for growth projects, with expectations to spend between $2 billion and $3 billion annually in the future. These projects, coupled with strategic acquisitions, are expected to increase Energy Transfer’s distributable cash flow, providing even more resources to reward investors.
In recent years, Energy Transfer has executed several key acquisitions to drive growth. Beyond the Crestwood deal, it acquired Lotus Midstream for $1.5 billion and WTG Midstream for $3.1 billion. These acquisitions have not only expanded Energy Transfer’s reach but have also set the stage for future distribution increases, ensuring a steady rise in passive income for its investors.
A Lucrative Future for Income Investors
The company’s commitment to rewarding its investors is evident in its plans to steadily increase its distribution. Energy Transfer aims to grow its payout by 3% to 5% annually, supported by quarterly distribution hikes. With a current yield nearing 8%, this growth is highly achievable, bolstered by the additional income from recent acquisitions. The accretion from the WTG Midstream deal alone is expected to contribute an estimated $0.04 per unit in 2025 and $0.07 per unit by 2027, further supporting distribution growth.
Despite the initial setbacks caused by the pandemic, Energy Transfer has emerged as a robust investment for passive income. Its financial flexibility, strong balance sheet, and commitment to growth make it a highly attractive option for income-focused investors. With plans to continue increasing its payout, Energy Transfer offers a bankable and growing income stream for years to come, ensuring its place as a top choice in the portfolio of those seeking long-term, passive income.
