ETP Stock: Top High Yield Stock Currently Pays 12.8%
If You Want to Earn a Double-Digit Dividend Yield, Read This
When it comes to finding stocks paying 10% or more, it doesn’t get much better than Energy Transfer Partners LP (NYSE:ETP).
Founded in 1995, Energy Transfer Partners is a master limited partnership (MLP). While ETP doesn’t make headlines very often, it is one of the biggest players in America’s midstream energy business.
As the name suggests, Energy Transfer Partners specializes in the transportation of energy products. Its portfolio consist of more than 71,000 miles of natural gas, crude oil, natural gas liquids, and refined products pipelines. The partnership also owns and operates the associated terminalling, storage, and fractionation facilities in 38 states.
In today’s market, a five-percent yield is often considered impressive. Energy Transfer Partners, on the other hand, offers a much more generous payout. With a quarterly distribution rate of $0.5650 per unit, ETP stock has an annual yield of 12.8%.
Of course, one of the reasons behind the partnership’s jaw-dropping yield is the downturn in its unit price. Because ETP comes from the energy sector, its unit price took a massive hit as oil and gas prices fell over the last three years. In the past 12 months, ETP stock plunged 26.4%.
When a dividend stock falls by that much, it could be a reflection of investors’ concerns about its dividend safety. And if the stock’s dividend is in danger, it wouldn’t be worth owning, no matter how attractive the yield is. As long-term investors are well aware, buying a stock before its dividend gets cut can turn into a very expensive lesson.
The thing is, though, while ETP’s unit price performance has been disappointing, the partnership’s payout is actually safe.
When it comes to evaluating the dividend safety of MLPs, the key metric to consider is distributable cash flow. This is calculated by taking the partnership’s net income, adjusting for certain non-cash items, and then subtracting maintenance capital expenditures. It is a measure of cash generated by the MLP’s operations.
In the third quarter of 2017, Energy Transfer Partners generated distributable cash flow of $1.05 billion. Distributions to be paid to partners for the quarter totaled $925.0 million. Therefore, the partnership had a payout ratio of 1.13 times. (Source: “Energy Transfer Partners Reports Third Quarter Results,” Energy Transfer Partners LP, November 7, 2017.)
In other words, despite being an ultra-high yielder, ETP was not paying out all the cash it generated from operations. This creates a margin of safety.
The payout has been growing, too. Over the last five years, ETP has raised its quarterly distribution rate from $0.2588 per unit to $0.565 per unit. That’s an increase of 118%. (Source: “Distribution History,” Energy Transfer Partners LP, last accessed December 21, 2017.)
Now, I know what you are wondering: how can an energy partnership afford to pay an increasing amount of distributions when the whole sector is deep in the doldrums?
Well, the reason lies in the fee-based nature of ETP’s business. The partnership does not drill any wells. Instead, it earns a fee by allowing other companies to use its midstream energy assets. For instance, in ETP’s interstate natural gas transportation and storage business, approximately 95% of revenue comes from reservation fee contracts. (Source: “Wells Fargo Pipeline, MLP and Utility Symposium,” Energy Transfer Partners LP, last accessed December 21, 2017.)
With fee-based operations, ETP can generate stable cash flows. And that’s why the partnership managed to pay rising distributions despite the downturn in the energy sector. Going forward, the partnership’s strategically located midstream assets will likely allow it to continue that track record.
That’s why Energy Transfer Partners is a top high-yield stock to consider.