Like energy transfer? You should check out this ultra high yielding dividend stock.

Energy transfer (NYSE: ET) is one of the largest and most diversified midstream energy service providers in the country. Those assets generate many of steady cash flow, about half of which is the master limited partnership (MLP) distribute to investors. With a yield of over 8%, it is a popular income investment.

Investors who like this income stream should check out their peers MLP Delek Logistics Partners (NYSE: DKL). The smaller midstream service provider currently yields around 11%. Although it has a higher risk profile, it has done a great job growing its monster cast over the years.

The giant of industry

The power transfer generates distributable cash flow of approximately $8.5 billion per year. The MLP distributes about $4.5 billion of that money investors every year. It keeps the rest to finance expansion projects, to increase its financial flexibility and to buy back opportunistically common units. The midstream giant has a strong investment grade balance sheet, supported by a leverage ratio trend toward the lower end of its target range of 4.0 to 4.5.

MLP uses its financial flexibility to expand its midstream platform. The company expects to invest $2.5 billion to $3.5 billion in organic expansion projects each year; plans to spend about $3.1 billion this year. Build new gas processing plants, additional export capacity and natural gas power plants. These projects should be online by 2026, giving it plenty of visibility into its ability to grow its cash flow. That helps support its plan to grow its distribution by 3% to 5% annually.

Energy Transfer is also a consolidator in the midstream sector. It bought Lotus Midstream for $1.5 billion in May 2023, completed its $7.1 billion merger with fellow MLP Crestwood Equity Partners in November, and acquired WTG Midstream in a $3.1 billion deal dollars in July. The increased acquisitions further support the distribution growth plan.

A hidden income gem

Delek Logistics Partners has many similarities with Energy Transferonly on a much smaller scale. Independent refiner Delek US Holdings formed MLP to provide you with logistics services. It at present derives approximately half of its revenue from its parent company, with the remainder from third-party clients. That concentration of customers makes it riskier than the much more diversified energy transfer.

The MLP generates fairly predictable cash flow, supported by long-term contracts with Delek US and other clients. It distributes most of the cash flow to investors. It grossed $67.8 million of cash in the second quarter, enough to cover the high-yield payout of 1.32 times relatively comfortably. Delek Logistics Partners retained the rest of this money to finance expansion projects and strengthen its balance sheet. MLP’s leverage ratio was 3.81 at the end of the second quarter, down from 4.34 at the end of last year. While Delek Logistics has a lower leverage ratio compared to Energy Transfer, it lacks investment grade credit, in part due to its less diversified and smaller scale business model. This increases its borrowing costs and risk profile.

The story continues

Delek Logistics is working to reduce dependence on its parent company by expanding its business to support more third-party customers. It recently agreed to buy H2O Midstream for $230 million to increase its ability to provide a full range of midstream services to oil and gas producers in the Permian Basin. MLP also bought the parent interest in the Wink to Webster oil pipeline and approved the construction of a new natural gas processing plant. These investments have MLP on track to increase its third-party earnings to 64% out of the total until the second half of next year.

The energy logistics company’s growing cash flow should allow it to further increase its distribution. It posted its 46th consecutive quarterly increase in July. This payout was 1.9% above the previous quarter and 5.3% higher year-over-year. With plenty of growth emerging from its recent investments, this MLP should have plenty of fuel to continue raising its dividend.

An alluring option

Energy Transfer is a leader in the midstream energy sector. It generates a lot of cash, which it uses to expand its network and distribution. This high-yielding and constantly growing payout makes it an ideal option for those looking for passive income.

Delek Logistics has many similarities with Energy Transfer, albeit on a much smaller scale. It offers a higher yield and has plenty of fuel to continue growing its payouts. These factors make it an attractive option for income-seeking investors who are comfortable with its higher risk profile and who invest in MLPs, which send a Schedule K-1 Federal Tax Form every year.

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Matt DiLallo has positions in energy transfer. The Motley Fool recommends Delek Us. The Motley Fool has a disclosure policy.

Like energy transfer? You should check out this ultra high yielding dividend stock. was originally published by The Motley Fool