Dividend investors are always on the hunt for stocks that can deliver regular, reliable income. And in today’s volatile market environment, securing a high dividend yield is more important than ever.
That’s why some eagle-eyed income seekers have Energy Transfer LP (NYSE: ET) in their sights. This pipeline operator sports an outsized 9% dividend yield that translates into a whopping $1.25 per share each quarter.
For investors building a portfolio focused on dividends, that type of payout provides a straightforward path to earning hundreds of dollars in recurring passive income. Specifically, an investment of less than $67,000 in Energy Transfer could kick out $500 monthly.
Here’s a detailed look at Energy Transfer’s unusually high yield – and how to best take advantage for regular dividend income.
Energy Transfer’s Blockbuster 9% Yield
Based in Dallas, Texas, Energy Transfer operates over 120,000 miles of natural gas, crude oil, natural gas liquids, and refined products pipelines across 38 states. The company moves nearly 30% of the natural gas consumed in the United States.
In simpler terms, Energy Transfer serves as a middleman in the energy industry – transporting oil and gas from producers to end users. Pipeline companies generally operate with long-term, stable contracts that lead to predictable cash flow.
As a midstream player, Energy Transfer’s fortunes don’t directly tie to commodity prices for oil and natural gas. Regardless of whether fuel prices are high or low, Energy Transfer earns money moving product from point A to point B.
And with assets across the U.S., as well as export terminals, the company enjoys a wide moat in its industry. Energy Transfer essentially operates a network – similar to railroad tracks – that would be extremely difficult and costly to replicate.
Aside from its pipeline network, perhaps Energy Transfer’s most attractive quality is its distribution yield.
Based on the company’s annualized dividend of $1.25 per share and recent stock price of $13.85, Energy Transfer offers an exceptional 9% dividend yield.
To put that into perspective, the average stock among S&P 500 members pays closer to a 1.5% dividend yield. So at 9%, Energy Transfer’s yield absolutely towers over the broader market.
Not only that, but management expects to return an eye-popping $6.5 billion to shareholders in dividends and buybacks over the next 12 months.
Now let’s discuss exactly how to turn that blockbuster 9% yield into $500 in monthly passive income…
Earning $500 a Month from Energy Transfer
At $1.25 each quarter – or $5 per year – every 100 shares of Energy Transfer stock kicks out $500 in annual dividend income.
With the goal being $500 monthly or $6,000 annually, we simply need to scale up our position size.
Here’s the math:
- Annual target income: $6,000
- Energy Transfer’s annual dividend: $1.25 per share
- Shares needed: $6,000 / $1.25 per share = 4,800
Thus, an investment of 4,800 shares – currently valued around $66,672 – would deliver $500 in monthly cash flow via Energy Transfer’s distributions.
That’s the beauty of dividend investing. Owning shares of quality income stocks allows investors to earn regular passive revenue that can compound over time.
And should Energy Transfer increase its distribution down the road – which it has done reliably over the years – your annual dividends would rise in tandem without any extra effort.
Speaking of which, Energy Transfer recently increased its payout for the third consecutive quarter. Management clearly remains committed to rewarding shareholders through thick and thin.
The company did post disappointing Q3 earnings results on November 1, with profits missing expectations. Higher interest expenses weighed on performance as Energy Transfer manages nearly $52 billion in long-term debt.
However, fueled by rising demand for exports and natural gas-fired power generation, the company reaffirmed full year guidance for adjusted EBITDA of $12.8 billion to $13 billion.
Now let’s discuss some key dividend investing strategies to truly maximize payouts from Energy Transfer stock…
My Tips for Maximizing Dividend Income
When angling for dividends, most investors naturally key in on yield above all else. And certainly, Energy Transfer’s 9% payout grabs attention.
But savvy dividend seekers know yield alone doesn’t guarantee the best income streams. Factors like distribution safety and dividend growth also determine how much (and how consistently) a stock pays over long periods.
With Energy Transfer yielding 9% annually – equivalent to 25% every three months – there’s undeniably heightened risk of a dividend reduction if business falters. Management could cut the payout to redirect cash toward debt reduction or capital projects.
Does that make Energy Transfer a yield trap? Not necessarily. But income investors should follow proven strategies to mitigate risk…
Reinvest Dividends for Exponential Growth
Rather than spending distributions immediately, investors should consider reinvesting dividends via Energy Transfer’s dividend reinvestment plan (DRIP). This automatically uses dividends to purchase additional ET shares commission-free.
Reinvesting distributions allows for dramatically faster position growth through the power of compounding. For instance, $50,000 allocated to Energy Transfer stock today could become over 14,100 shares in 20 years – assuming the dividend stays level and distributions are plowed back in quarterly.
That reinvestment program would also provide immediate liquidity if ever needed, as investors can quickly sell units purchased through the DRIP.
Dollar-Cost Average Over Time
Energy Transfer offers a best-in-class dividend yield – but chasing extra income does boost risk. To offset this, investors can dollar-cost average into a position rather than buying all at once.
Dollar-cost averaging means steadily building a position in equal amounts over weeks, months or even years. This helps cut risk should the stock fall further, lowering one’s overall average cost.
For example, allocating $500 monthly to Energy Transfer builds a 4,800-share position – enough for $500 in monthly dividends – within 10 months. And by scaling in gradually, investors reduce chances of overpaying if shares decline in the short run.
Hold in Retirement Accounts
Another expert move is holding wide-moat, high-yield stocks like Energy Transfer in tax-advantaged retirement accounts. This avoids owing annual income taxes on rich dividends.
Based on today’s tax brackets, Energy Transfer’s hefty distribution carries a top rate of over 20% at the federal level. But housing ET stock in a Roth IRA or 401(k) allows escaping this tax drag altogether.
Additionally, required minimum distributions (RMDs) from traditional IRAs could force unwanted dividend-tax bills on older investors. So utilizing Roth accounts when available is wise.
The Bottom Line
Between its high 9% yield and discounted valuation – Energy Transfer trades 30% below its 5-year average forward P/E – patient income investors are wise to consider ET stock today.
Building even a modest 960-share holding throws off $100 monthly with potential to one day deliver significantly more. For investors seeking regular dividend payments, tapping into Energy Transfer’s steady pipeline cash flows presents an intriguing opportunity.