I own many investments that generate passive income. I currently get most of my income from Energy transfer (NYSE:ET). This is due to my growing position and the high-yield and steadily increasing distribution of the Master Limited Partnership (MLP).
I feel very comfortable with my excessive investment in high yield bonds MLP. This is why.
Building a position that generates top income
I’ve had one interesting history with Energy Transfer. At the beginning of 2020 I added the midstream giant to my portfolio for the first time, right before the pandemic hit. On the one hand, that turned out to be terrible timing, because the MLP then cut distribution in half to preserve cash.
However, Energy Transfer used the extra money it had to strengthen its financial base. It paid off the debts, causing debt levels to steadily decline leverage ratio. That strategy has Real paid dividends for investors. Today, Energy Transfer has a strong investment-grade balance sheet with a leverage ratio in the lower half of the target range of 4.0 to 4.5x.
That improving leverage ratio has given Energy Transfer more financial flexibility. It has used that flexibility to rebuild its payout (the current payout exceeds pre-pandemic levels) and consolidate the midstream sector. Energy Transfer has made several acquisitions in recent years, including the purchase of Crestwood Equity Partners in a $7.1 billion deal last year.
Crestwood was one of mine bigger possessions. That allowed me to consolidate two top income positions in one stronger investment. I have also expanded my position at Energy Transfer several times in recent years, further increase my income from this position.
An elite income investment
Energy Transfer ticks all the boxes for me. The midstream giant is producing plenty of steady cash flow. About 90% of adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) come from stable, fee-based sources. The MLP also has a balanced asset mix. That combination of stability and diversification help reduce risk.
Meanwhile, the company pays out a conservative percentage of its stable cash flow to investors. It currently produces approximately $8.5 billion in distributable cash flow every year, while making about $4.5 billion in distributions. That low 53% payout ratio allows the company to retain about $4 billion of cash each year for other initiatives such as growth capital projects, further debt repayments and unit buybacks. With capital expenditure growth expected to be approximately $3.1 billion this year (and between $2 billion and $3 billion annually over the long term), Energy Transfer has sufficient financial flexibility before tapping into its strong balance sheet.
Energy Transfer’s capital investments will help increase distributable cash flow. In addition, the company has made several acquisitions in the past year to further strengthen the growth rate. In addition to the Crestwood acquisition, the company also bought Lotus Midstream for $1.5 billion last year and recently WTG Midstream for $3.1 billion. With a strong balance sheet, Energy Transfer has sufficient financial flexibility to make additional acquisitions as opportunities arise.
The MLP’s growing cash flow supports steadily increasing distribution. Energy Transfer aims to increase its payout by 3% to 5% annually by increasing the distribution payment quarterly ($0.0025 per unit, or $0.01 per year). That’s a healthy growth rate for a company that already offers a monster yield (almost 8%).
It is also very feasible. The estimated growth of the WTG Energy deal alone ($0.04 per unit in 2025, rising to $0.07 per unit in 2027) will support distribution increases for several years.
A very lucrative, affordable income stream
While my investment in Energy Transfer got off to a rough startover the years it has become my largest passive income producer. The company should bring me even more income in the future, given its plans to steadily increase the payout every quarter. Immediately strong financial basis and stable cash flow, this looks like a very affordable income stream. Therefore, I plan to continue keeping one big position in Energy Transfer, and is likely to continue to increase it in the future.
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Matt DiLallo holds positions in Energy Transfer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Why Energy Transfer is My Best Investment for Passive Income was originally published by The Motley Fool
