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In the constellation of energy stocks today, Energy Transfer (NYSE: ET) is a standout, offering investors a lofty 7.7% yield. That's extremely attractive given that the S&P 500 index, even after a big sell-off, is only yielding around 1.3%. The average energy stock is yielding just 3.1%.
But before you rush off to buy shares of this Dallas-based pipeline company because of its high yield, you need to know a little bit more about its distribution history. In the end, you might be better off with an industry peer, Enbridge (NYSE: ENB). Here's why.
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Energy Transfer's yield is good today
Energy Transfer has a lofty 7.7% yield right now. As noted, that is well above average and it's even higher than Enbridge's 5.8% yield. If all you care about is the yield that exists today, Energy Transfer is the clear winner. But a look back at the history of the master limited partnership's yield is very telling.
While Enbridge's yield has waxed and waned over time, it hasn't seen massive peaks and valleys. Energy Transfer's yield rocketed higher in 2016 and 2020. "Why?" should be the first word to pop into your mind. The answers are a bit unsettling.
In 2016, the energy sector was going through a rough patch. Energy Transfer agreed to buy Williams Companies (NYSE: WMB) but quickly got cold feet. It was an ugly period, and investors were worried that the acquisition, if it were completed, would lead to a dividend cut. That didn't happen, but there were clearly some worrying decisions made by Energy Transfer during the period based on the market reaction.
In 2020, meanwhile, Energy Transfer cut its distribution in half because of the uncertainty surrounding the coronavirus pandemic. Most dividend investors are looking for reliable income streams, not ones that get cut in the face of adversity. To be fair, the distribution is increasing again and is now above where it was before the cut. But Energy Transfer basically let investors down right when they probably needed income the most.
Enbridge has a better dividend history
While it probably wouldn't be a huge mistake to buy Energy Transfer, that doesn't mean it would be the best decision, either. If you are one of those dividend investors that actually finds dividend reliability important, well, Enbridge is probably going to be more to your liking. The Calgary-based company has increased its dividend, in Canadian dollars, for 30 years and counting.
