ET - Passive Income: Defensive 8-10% Yields With Strong Growth Potential

2023-08-28 16:04:28 ET

Summary

• Passive income is arguably the best way to invest, both for retirees and younger investors who are looking to compound wealth for the long-term.
• Fortunately, there are a plethora of sustainable high yielding opportunities available right now.
• We share three that not only offer attractive current yields, but also have the potential to grow their payouts at a brisk pace for years to come.

Passive income investing is a great approach to both saving for and financing retirement due to the following reasons:

1. Streamlined Retirement Planning: After determining your anticipated retirement budget and the projected long-term inflation rate, investors merely need to construct a portfolio of reliable dividend stocks that yield more than your living costs and are likely to collectively outpace the expected inflation rate. This approach differs from building a portfolio of low-yield index funds like SPY and QQQ and hoping market sentiment cooperates.

2. Emotion-Free Investment Approach: Rather than riding the emotional roller coaster that accompanies constant portfolio value shifts, passive income-oriented investors gauge their portfolio's worth by its generated passive income stream. While markets experience ups and downs, dividends from reputable companies tend to remain more stable and consistently increase over time. Instead of panic-selling during a market crash, passive income investors can sleep well at night by remaining calm during market volatility and letting the dividends flow.

3. Indicators of Exceptional Businesses: Businesses that manage to consistently raise dividends over extended periods of time while still maintaining their competitive position typically indicate that there is something special about that company.

In this article, we will take a look at three passive income investments that not only offer very attractive and sustainable current yields, but also appear poised to grow those payouts at a pace that matches or exceeds the rate of inflation for years to come.

#1. Energy Transfer Stock ( ET )

ET is a highly attractive passive income stock because it offers:

1. Attractive Distribution Yield : ET's 9.6% NTM yield makes it an extremely attractive income investment as it offers a generous premium to the current 10-year treasury yield (4.21%) as well as that which is offered by prominent dividend growth ETFs like Schwab U.S. Dividend Equity ET ( SCHD ) .

2. Reduced Risk Profile : ET has been aggressively paying down debt and improving its portfolio's quality and diversification (most recently through an announced acquisition of Crestwood Equity Partners ( CEQP ), earning it a credit rating upgrade from S&P from BBB- to BBB.

3. Solid Growth Potential : ET has announced that it plans to grow its distribution at a 3-5% CAGR moving forward, putting it on a firm path to growing the payout at a pace that exceeds inflation. This growth will be supported by its strong distribution coverage ratio (1.95x expected in 2023), its reduced interest expense as it continues to pay down debt, its robust organic growth project pipeline (especially if the Lake Charles project gets approved), and its regular practice of making strategic and accretive bolt-on acquisitions.

4. Considerable Upside: Last, but not least, ET remains meaningfully undervalued with an EV/EBITDA ratio of 7.68x, well below both its own historical averages and broader industry valuation levels.

#2. NextEra Energy Partners Stock ( NEP )

NEP is a highly attractive passive income stock because it offers:

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