Better Dividend Stock: MPLX vs. Energy Transfer

Master limited partnerships (MLPs) can make great income-generating investments. These pass-through entities distribute a meaningful percentage of their cash flows to investors. Because of that, they typically offer higher dividend yields.

Two top MLPs are Energy Transfer (NYSE: ET) and MPLX (NYSE: MPLX). Here's a look at the better one to buy for income right now (for those comfortable with receiving the Schedule K-1 Federal Tax Form these entities send their investors each year).

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Drilling down into these MLPs

The main draw of MLPs is their lucrative income streams. Energy Transfer currently yields nearly 7%, while MPLX is over 8%. Both payouts are on a solid foundation because the companies generate stable cash flow and have strong financial profiles.

Energy Transfer is a giant in the midstream sector. It has a diversified and well-balanced asset mix that primarily generates fee-based cash flows (90% of its earnings) secured by long-term contracts and government-regulated rate structures. While MPLX isn't quite as large nor as diversified, it has a very similar business model. Most of its assets generate fee-based cash flow backed by government-regulated rate structures and long-term contracts with energy companies like its parent company, refining giant Marathon Petroleum.

The MLPs also have strong financial profiles.

Data source: Energy Transfer and MPLX.

MPLX's leverage ratio is currently well below the 4.0 times range its stable cash flows can support. That's allowing the MLP to return more cash to investors. It recently increased its distribution by 12.5% (its third straight year of double-digit distribution growth). In addition, the MLP has been repurchasing some of its units ($76 million in the third quarter and $226 million so far this year).

Energy Transfer has been retaining additional cash to continue strengthening its balance sheet. It's on track to achieve a leverage ratio in the lower half of its 4.0x-4.5x target range. Because of that, the MLP expects to start prioritizing unit repurchases with its additional excess free cash flow after funding its growing distribution (3% to 5% annual growth target) and capital spending plan.

What's ahead for these two MLPs

MPLX currently has several expansion projects underway that it expects will come online through 2026. For example, the company and its partners are building the Blackcomb and Rio Bravo natural gas pipelines. MPLX is also part of a joint venture expanding the BANGL natural gas liquids pipeline. On top of that, the MLP is building a few more natural gas processing plants. These growth projects will supply the MLP with incremental cash flow as they come online over the next couple of years.

The MLP also has ample financial flexibility to continue making accretive new investments as opportunities arise. For example, it boosted its stake in BANGL earlier this year. It also acquired additional ownership interests in some existing joint ventures and a gas gathering system. In addition, it participated in the formation of a joint venture that combined the Whistler and Rio Bravo Pipelines and the subsequent approval of Blackcomb. Future new investments would further enhance and extend the MLP's growth profile.

Energy Transfer has several expansion projects underway that should come online through 2026. Notable projects include its Nederland Flexport Expansion Project, and the recently approved $2.7 billion Hugh Brinson Pipeline. Those projects will provide it with additional sources of incremental cash flow over the next few years.

The MLP also has several other major expansion projects under development, including the long-delayed Lake Charles LNG project. Securing those additional projects would add more fuel to the midstream giant's growth engine.

Finally, Energy Transfer is a consolidator in the midstream sector. It recently acquired WTG Midstream in a $3.1 billion deal. The highly accretive transaction will boost its cash flow through 2027. Before that, the company acquired Lotus Midstream and fellow MLP Crestwood Equity Partners in 2023. Given its strong financial profile, the MLP has ample financial flexibility to continue making accretive acquisitions as opportunities arise.

Two excellent income options

Energy Transfer and MPLX are both great MLPs to own for those seeking to generate passive income. Energy Transfer offers a strong income stream that it has pledged to increase by 3% to 5% per year. MPLX currently offers a higher yield, which it backs with a very strong financial profile. It has also been growing its payout faster than Energy Transfer, which could continue.

While both are great options, MPLX currently offers a higher-yielding payout that could continue to grow at a higher rate. That makes it the more appealing MLP to buy for income right now.

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Matt DiLallo has positions in Energy Transfer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.