Top-Notch Dividend Shares to Put $1,000 into as We Speak
Investing in dividend-generous stocks with high yields is a popular strategy, but it's not always the key to a successful investment. That's why I'm especially fond of Energy Transfer (ET), currently down 0.05%. Allow me to present three reasons why you might want to consider this stock as a $1,000 investment opportunity, provided you have funds on hand that aren't earmarked for monthly expenses, emergency funds, or debt repayment.
- Energy Transfer's Sturdy and Growing Distributions
As a master limited partnership (MLP), Energy Transfer pays out a distribution rather than a traditional dividend. This minor tax difference brings about the return of capital component, which gets deferred till your sale of the stock. While it may prompt some extra end-of-year paperwork, this part of the distribution actually benefits you by flicking down your investment's cost basis, hence minimizing taxes.
At present, Energy Transfer offers a quarterly distribution of $0.3225, translating to a forward yield of 6.5%. The distribution is backed by a substantial distributable cash flow, which is a company's operating cash flow less maintenance capital expenditures. In the last quarter, the business paid out $1.1 billion in distributions while generating $2 billion in DCF, resulting in an impressive coverage ratio of 1.8 times.
While Energy Transfer possesses a portion of its operations that are exposed to commodity spreads and prices, 90% of its revenue hails from fee-based contracts, providing it with a fair amount of predictability. The firm has fortified its balance sheet over the past few years, placing its leverage within the lower half of its targeted 4 to 4.5 times range.
The company is poised to boost its distribution by 3% to 5% annually while considering the prospect of stock buybacks once its leverage target is met.
- Energy Transfer's Growth Opportunities
Energy Transfer isn't solely about its distribution; it also boasts robust growth potential. It houses one of the biggest integrated midstream systems in the U.S., offering plenty of expansion options. The company has forecasted spending between $2.8 billion and $3 billion on growth projects for 2024. With past expectations lying between $2 billion and $3 billion, Energy Transfer has amped up its target following the discovery of abundant growth possibilities.
Typically, midstream companies seek unlevered project build rates of at least six to eight times, enabling them to recoup their investments in six to eight years. With $3 billion per year dedicated to growth projects, Energy Transfer could add another $375 million to $500 million per year in additional EBITDA as these projects mature.
Energy Transfer is also experiencing a surge in interest from power plants and data centers seeking connections to its pipelines for their natural gas requirements. On its latest earnings call, it disclosed receiving calls from approximately 45 power plants and 40 prospective data centers regarding this matter, with the cumulative demand potential of 16 billion cubic feet per day. This is not all, as the company has announced plans to build a new $2.7 billion natural gas pipeline to cater to power plant and data center growth in Texas.
- Energy Transfer's Attractive Valuation
Besides its robust distribution and growth opportunities, Energy Transfer is a reasonably priced investment option, both historically and compared to its peers. EV/EBITDA is generally the go-to method for valuing pipeline stocks, as it considers net debt used to build out the asset base and EBITDA, which subtracts the non-cash depreciation costs of those assets.
On this basis, the company trades at an EV/EBITDA ratio of 8.4 times 2024 analyst estimates, which ranks as one of the lowest amongst midstream MLPs. Back in 2011 and 2016, midstream MLPs typically traded at a 13.7 EV/EBITDA multiple, putting both Energy Transfer and the MLP sector overall significantly below historical levels despite their renewed strong growth prospects.
Currently, analysts estimate Energy Transfer's EBITDA will be nearing $16.9 billion by 2026, up from $15.9 billion in 2024, indicating a solid and growing firm.
All of these factors make Energy Transfer a standout choice for anyone seeking a high-yield dividend stock offering a high yield, distribution growth, EBITDA growth, and an enticing valuation.
- To further strengthen your investment portfolio, you might want to consider allocating some of your funds towards investing in Energy Transfer, as its current valuation is quite attractive compared to its historical levels and peers in the midstream MLP sector.
- If you're looking for a diversified investment opportunity with a strong financial foundation and growth potential, Energy Transfer's robust distribution, expansion projects, and increasing demand for natural gas connections from power plants and data centers make it an attractive possibility for your $1,000 investment.
