Why energy transfer is my best passive income investment | A motley fool

I own many investments that generate passive income. I am currently earning the highest income Energy Transfer (ET -0.49%). This is thanks to my growing position and high-performing and constantly growing limited partnership (MLP) distribution.

I feel very comfortable with my oversized investment in high performance products MLP. Here’s why.

Building a position that generates the highest income

I had interesting story from Energy Transfer. I first added a midstream giant to my portfolio in early 2020, Normal before the pandemic broke out. On the one hand, this turned out to be terrible timing, as the MLP moved to cut distributions in half to preserve cash.

However, Energy Transfer used the additional cash retained to strengthen its financial foundation. He paid off the debt, which was systematically decreasing leverage ratio. This strategy does Really paid a dividend to investors. Today Energy Transfer has strong investment grade balance sheet with a leverage ratio in the lower half of the target range of 4.0-4.5 times.

Improving the leverage ratio gave Energy Transfer greater financial flexibility. It has used this flexibility to rebuild its payouts (current payments are above pre-pandemic levels) and consolidate its midstream sector. Over the past few years, Energy Transfer has completed several significant acquisitions, including the $7.1 billion purchase of Crestwood Equity Partners last year.

Crestwood was one of mine greater farms. For this reason, it allowed me to consolidate the two highest income positions into one stronger investment. Over the last few years, I have increased my position on energy transfer several times, further increasing my income from my position.

Elite income investment

Energy Transfer meets all the criteria for me. The midstream giant generates strong, consistent cash flow. Approximately 90% of adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) come from stable, paid sources. The MLP also has a well-balanced set of assets. This combination Stability and diversification help reduce risk.

Meanwhile, the company is giving investors a conservative percentage of its stable cash flow. It currently generates approximately $8.5 billion in distributable cash flow every year, while making distributions worth approximately $4.5 billion. With this low payout rate of 53%, it is possible to keep approximately $4 billion cash each year for other initiatives such as growth capital projects, further debt repayment and unit buybacks. With capital spending growth expected to be approximately $3.1 billion this year (and $2-3 billion annually over the long term), Energy Transfer has ample financial flexibility before it leverages its strong balance sheet.

Energy Transfer’s capital investments will help increase distributable cash flow. Additionally, the company has made several significant acquisitions over the past year to further increase the growth rate. In addition to the Crestwood acquisition, the company bought Lotus Midstream for $1.5 billion last year and recently purchased WTG Midstream for $3.1 billion. With a strong balance sheet, Energy Transfer has sufficient financial flexibility to make additional incremental acquisitions as new opportunities arise.

MLP’s growing cash flow supports ever-increasing distribution. Energy Transfer aims to increase its payouts by 3% to 5% annually by raising its distribution payment each quarter ($0.0025 per unit, or $0.01 per year). This is a healthy growth rate for the company it already offers a monster yield (almost 8%).

It is also highly achievable. The estimated upside from the WTG Energy transaction alone ($0.04 per unit in 2025, increasing to $0.07 per unit in 2027) will support distribution growth for several years.

A very lucrative, bankable source of income

While my investment in Energy Transfer started off rockyover the years it has become my biggest passive income producer. The company should provide me with even more income in the future, given its plans to steadily increase payouts each quarter. WITH strong financial foundations and stable cash flow, it looks a very profitable source of income. So I plan to continue keeping it big position in Energy Transfer and will likely continue to increase it in the future.