Better Dividend Stock: Western Midstream vs. Energy Transfer
Energy Transfer and Western Midstream Partners have high distribution yields.
The MLPs back their payouts with stable cash flow and strong financial profiles.
Both have solid growth prospects.
10 stocks we like better than Energy Transfer ›
Energy Transfer (NYSE: ET) and Western Midstream Partners (NYSE: WES) are among the largest master limited partnerships (MLPs). These midstream companies generate stable cash flow, much of which they pay out to investors. Energy Transfer's distribution yields 7.5%, and Western Midstream's is over 9%.
Most investors will likely prefer to own only one of these MLPs, especially due to the potential tax complications associated with the annual Schedule K-1 federal tax forms they send to investors. Here's a look at which MLP is the better buy for those seeking sustainable, growing dividend income.
Drilling down into their operations
Energy Transfer and Western Midstream operate diversified energy midstream networks.
Western Midstream serves the Delaware, DJ, and Powder River basins. It primarily gathers, treats, processes, and transports natural gas, NGLs, and crude oil, as well as provides water disposal services. It generates fee-based income secured by long-term contracts.
Energy Transfer offers broader diversification, as it serves a range of commodities, including natural gas, NGLs, crude oil, and refined products. Its integrated wellhead-to-water system features over 130,000 miles of pipelines linking gathering and processing assets, storage facilities, and export terminals. About 90% of its earnings are fee-based. Energy Transfer's larger, more diversified infrastructure business model reduces risk and increases its growth potential.
There are other notable differences between these MLPs. Oil giant Occidental Petroleum is one of Western Midstream's largest customers and holds a 44.8% direct interest in the MLP, as well as a 2% stake in its operating company. Energy Transfer, on the other hand, doesn't have a single significant customer or a large controlling shareholder. Instead, the company controls two other MLPs (Sunoco and USA Compression), which supply it with additional income and enhance its growth profile.
Comparing their financial positions
A high dividend yield can sometimes signal financial distress, but that's not the case with these MLPs. Energy Transfer is in the best financial position in its history. Its leverage ratio is now in the lower half of its target range of 4.0-4.5 times. Additionally, the MLP generates enough cash to cover its payout by more than two times, providing it with the flexibility to invest in growth projects and make acquisitions.
Western Midstream also maintains a strong financial position, backed by a leverage ratio currently below 3.0x. While Western Midstream has a higher payout ratio, it expects to generate sufficient free cash flow this year to cover its capital expenditures with some room to spare. As a result, it also has ample financial flexibility to make bolt-on acquisitions and approve additional organic expansion projects.
A look at their growth profiles
Energy Transfer plans to invest $5 billion in growth capital projects this year, including a major new natural gas pipeline, several additional gas processing plants, and increased export capacity. Those projects should fuel accelerated earnings growth in the 2026-2027 time frame.
Meanwhile, the company has several more expansion projects under development, including its Lake Charles LNG export terminal. Energy Transfer also has the financial capacity to continue its industry consolidation strategy (it typically makes one multibillion-dollar acquisition per year to enhance its capabilities and drive growth).
These growth investments support Energy Transfer's outlook for 5% earnings growth this year, which should accelerate in 2026. That backs its plans to increase its high-yielding distribution by 3% to 5% annually.
Meanwhile, Western Midstream expects its 2025 capital spending to be between $625 million and $775 million, with 65% allocated to growth initiatives. It aims to use its financial flexibility for additional organic expansions and accretive bolt-on acquisitions as opportunities arise. These growth investments should drive mid-single-digit cash flow and distribution growth.
High-quality, high-yielding investments
Western Midstream and Energy Transfer offer high-yielding distributions, backed by stable cash flows and strong financial profiles. As a result, either would be a solid option for those seeking to generate passive income. However, Energy Transfer's greater diversification reduces risk and provides it with more growth potential. Those features make it a better choice for investors seeking a sustainable, growing income stream.
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Matt DiLallo has positions in Energy Transfer. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
Better Dividend Stock: Western Midstream vs. Energy Transfer was originally published by The Motley Fool
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