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How to Earn $250 a Month From Energy Transfer Stock
Key Points
Energy Transfer is a master limited partnership (MLP) that invests in assets like oil and gas pipelines.
You would need 2,205 shares of Energy Transfer, costing $45,136, to generate around $250 per month.
Energy Transfer may be a great way to generate income, but reinvesting distributions may be the optimal approach to MLP investing.
Energy Transfer (NYSE: ET) is one of the largest U.S.-listed master limited partnerships (MLPs) specializing in the ownership of pipelines and other midstream energy assets. Based on current prices, Energy Transfer has a forward distribution yield of 6.64%.
In other words, add up its quarterly cash distributions and divide by the current stock price, and you'll get approximately this figure. Considering this, let's run the numbers and see how many shares of this pipeline stock you'd need to own in order to earn $250 monthly.
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Building a $250-per-month income stream from Energy Transfer stock
Considering the complexities of MLPs and taxation, we will focus on a gross dividend income of $250 per month from an Energy Transfer position, for purposes of our calculation. A monthly payout of $250 comes out to $3,000 per year. Energy Transfer pays $1.36 per share in annual distributions.
Divide $3,000 by $1.36, and you get 2,205 shares, worth around $45,136 based on Energy Transfer's current stock price. From this position, you'd generate around $2,998.80 in dividend income annually, or just under $250 per month.
The case for reinvesting your distributions
If you have just over $45,000, buying Energy Transfer is a great way to get an upper-single-digit forward yield from your investment. Besides the relatively high forward distribution rate, this MLP has a long track record of steadily raising its payout by several percentage points each year, which helps ensure your investment keeps up with inflation.
However, what if, instead of spending your Energy Transfer distributions or investing them elsewhere, you chose to reinvest cash distributions into more MLP units? Over the past five years, Energy Transfer has generated total returns, or price appreciation plus distributions, totaling 204% (24.9% annually), versus just 93% (14% annually) for the S&P 500 (SNPINDEX: ^GSPC) . Although total returns can vary over time, this figure alone demonstrates the compounding potential of this stock.
Thomas Niel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.