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Dividend stocks are an essential component of any investor's portfolio. While the stock market remains the single-best way to generate serious wealth, it is dividend stocks that will get you there faster with lower risk.
Although the S&P 500 has an historic return of around 10.5% annually, dividends account for 85% of the total. Without dividend stocks and the reinvestment of those payouts, the benchmark index's gains would be meager.
It shouldn't be surprising. Income-generating stocks represent companies that are successful and profitable, having proven themselves through numerous economic cycles. Even better are those that not only pay a dividend, but have raised the payout over time.
JPMorgan Asset Management found that over the four decades between 1972 and 2012, companies that initiated a dividend and then raised it beat non-payers by six-to-one. Dividend stocks returned 9.5% versus 1.6% returns for non-payers.
If you're interested in generating passive income for your portfolio, then oil and gas midstream operator Energy Transfer ( NYSE:ET ) may be the best stock to buy today.
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- Investing in stocks has proved to be the best way to build fabulous wealth and dividend stocks are the best strategy to use to accomplish this.
- Dividend stocks have outperformed non-payers by a six-to-one margin and Energy Transfer ( ET ) is transforming itself into a dividend growth juggernaut.
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Best in class
Energy Transfer has become one of the largest midstream players in the energy industry
Organized as a master limited partnership (MLP), Energy Transfer pays a high-yielding dividend that is continuously growing. It owns a large network of pipelines and storage facilities for the energy industry and can move oil and gas coast-to-coast and border-to-border.
Over the past decade, the midstream player built itself into one of the largest midstream energy companies , with over 125,000 miles of pipeline. It transports hydrocarbons, such as natural gas, natural gas liquids (NGLs), crude oil, and refined products. About 27% of its business is in NGLs and refined products, 22% in crude, 21% in natural gas pipelines and 18% in gathering and processing. Especially in the export markets, Energy Transfer is a leader with a 20% share .
It also owns approximately 21% of Sunoco ‘s ( NYSE:SUN ) outstanding shares, as well as its general partner interests and incentive distribution rights.
Because many of its pipelines operate under long-term contracts, they may also feature take-or-pay agreements. That means Energy Transfer is paid regardless of whether or not the customer utilizes the agreed-upon capacity and no matter what the price of oil or gas goes for.
It ensures the midstream energy stock sees steady cash flows, which allow ET to pay a reliable dividend that yields 7.8% annually.
Beware the tax man
Because Energy Transfer is organized as an MLP, it may create complex tax issues for investors
Since Energy Transfer is an MLP, it is required to pay out all earnings not needed for current operations and maintenance of capital assets to their unit holders in the form of a cash distribution.
In that regard, MLPs are similar to real estate investment trusts (REITs), which although structured as a corporation rather than a partnership, are required to pay at least 90% of their profits as dividends to shareholders.
Where there is a big difference, though, is that REIT distributions are generally taxed as ordinary income and are reported on the simpler 1099-DIV form. Investors in MLPs, on the other hand, are taxed on their share of the income received from the partnership. That means shareholders (they're actually called unit holders) have to file a K-1 tax form, which could be more complex.
A dividend powerhouse in the making
Energy Transfer has raised its dividend every quarter since the fourth quarter of 2021
Ever since the pandemic when Energy Transfer cut its dividend in half because of the highly leveraged nature of its business and the uncertainty on energy markets at the time, it has been raising the payout again.
Beginning in the fourth quarter of 2021, the energy stock has raised its dividend every single quarter. Since that time, the dividend has more than doubled, growing from $0.61 per share to $1.28 per share.
Energy Transfer might not be right for every situation because of its status as an MLP. However, if it fits your investment objectives, parking $1,000 in ET stock could generate substantial passive income for your portfolio over time.
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