Why Power Transfer is the Greatest Passive Income Investment

I own many investments that generate passive income. I currently have the most income from Energy transfer (ET -0.49%). This is due to my growing position and high-yielding, steadily growing master limited partnership (MLP) distribution.

I feel very comfortable with my huge investment in large production MLP. Here’s why.

Building a top income generating position

I had a interesting history with energy transfer. I first added the midstream giant to my portfolio in early 2020, correct before the pandemic hit. On the one hand, it turned out to be a terrible time, as MLP proceeded to halve its distribution to conserve cash.

However, Energy Transfer used the additional retained cash to shore up its financial foundation. He repaid the debt, which led steadily down leverage ratio. That strategy has indeed paid dividends for investors. Today, Energy Transfer has a strong investment-grade balance sheet with a leverage ratio in the lower half of the 4.0 to 4.5 times target range.

This improvement in the leverage ratio has provided the power transfer with increased financial flexibility. It has used this flexibility to rebuild its pay (current pay exceeds pre-pandemic levels) and strengthen the midstream sector. Energy Transfer has completed several incremental acquisitions in recent years, including buying Crestwood Equity Partners in a $7.1 billion deal last year.

Crestwood was one of mine bigger holdings. Because of this, it allowed me to consolidate two maximum income the positions in one stronger investment. I have also added to my energy transfer position several times over the past few years, further increasing my income from the position.

An elite income investment

Energy Transfer checks all the boxes for me. The midstream giant produces plenty of steady cash flow. About 90% of its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) come from stable, tax-based sources. The MLP also has a well-balanced asset mix. That combination of stability and diversification help reduce risk.

Meanwhile, the company distributes a conservative percentage of stable cash flow to investors. It currently produces distributable cash flow of approximately $8.5 billion every year, while making distributions of approximately $4.5 billion. This low payout ratio of 53% allows it to retain about $4 billion of cash each year for other initiatives such as growth capital projects, additional debt payments and unit buybacks. With capital expenditure growth expected to be approximately $3.1 billion this year (and $2 billion-$3 billion annually over the long term), Energy Transfer has ample financial flexibility before access its strong balance sheet.

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

The MLP’s growing cash flow supports a steadily growing distribution. Energy Transfer aims to increase its payout by 3% to 5% annually by increasing distribution payments each quarter ($0.0025 per unit or $0.01 annually). This is a healthy growth rate for a company which already offers a monster yield (almost 8%).

It is also very doable. The expected growth from the WTG Energy deal alone ($0.04 per unit in 2025, rising to $0.07 per unit in 2027) will support distribution increases for several years.

A very profitable, banking income stream

While my investment in energy transfer had a rough starthas become my biggest passive income producer over the years. The company should provide me with even more income in the future, given its plans to consistently increase its payouts each quarter. With a strong financial foundation and stable cash flow, that looks like a very bankable income stream. That’s why I plan to keep one great position in power transfer and will likely continue to add to it in the future.