Energy Transfer's Payout Is Covered Twice Over. Here's Why That Matters More Than the Yield Itself.
Key Points
Energy Transfer pays a high forward yield of 6.3%.
Its distributions accounted for less than half of its distributable cash flow this year.
Energy Transfer (NYSE: ET), which operates more than 140,000 miles of pipeline across 44 states, pays a forward yield of 6.3%. That high yield might seem risky, but it can easily cover its distributions with its cash flow. Let's see why that balance makes it a great income investment.
How does Energy Transfer cover its distributions?
As a midstream pipeline operator, Energy Transfer charges both upstream and downstream companies "tolls" to transport natural gas, crude oil, and other resources through its pipelines. That business model is well insulated from volatile commodity prices because it only needs those resources to keep flowing to grow its profits and distributable cash flow (DCF).
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As long as Energy Transfer's DCF covers its total distributions, its payout will remain sustainable. It reduced its distributions in 2020 and 2021 as it dealt with the COVID-19 pandemic, but it raised them again over the following years as its business stabilized.
Metric (Billions) |
2020 |
2021 |
2022 |
2023 |
2024 |
2025 |
1H 2026 |
|---|---|---|---|---|---|---|---|
DCF |
$5.74 |
$8.22 |
$7.45 |
$7.58 |
$8.36 |
$8.21 |
$5.29 |
Distributions |
$2.47 |
$1.78 |
$3.09 |
$3.99 |
$4.39 |
$4.56 |
$2.32 |
Data source: Energy Transfer.
It typically allocates about half of its DCF to distributions. In the first half of 2026, it covered its $2.32 billion in distributions with its $5.29 billion in DCF, giving it a coverage ratio of 2.28x. It aims to increase its distribution by 3%-5% annually, provided the ratio remains around 2x, with a target cash yield of 7%-8%. Therefore, it has plenty of room for future hikes.
But investors should understand where that cash comes from
Energy Transfer operates as a master limited partnership (MLP) rather than a C corporation. So if you invest in Energy Transfer, you technically become a partner who owns a unit of the company, rather than an investor who owns a share of a corporation.
That distinction enables Energy Transfer to blend a return of capital (your own cash) with its income to pay tax-efficient distributions instead of conventional dividends. Only the portion of that distribution that includes Energy Transfer's income is taxed every year. But in exchange for those lower taxes, you'll need to file a separate K-1 form (instead of the 1099-DIV) with the IRS.
While the value of Energy Transfer's units declines on each distribution day, it's still using the remaining cash to expand its infrastructure. Therefore, the value of its underlying business continues to grow as it funds its large distributions. That's why it's a solid income investment.
Leo Sun has positions in Energy Transfer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.