Better Dividend Stock: Western Midstream vs. Energy Transfer

Energy Transfer (ET) and Western Midstream Partners (WES) are large MLPs offering high distribution yields (7.5% and over 9% respectively), underpinned by stable, fee-based cash flows and robust financial profiles. Both companies are pursuing growth, with ET planning $5 billion in 2024 capex for accelerated earnings and 3-5% annual distribution increases, while WES targets mid-single-digit cash flow growth from its 2025 investments. Ultimately, ET is presented as the superior choice for investors seeking sustainable, growing income due to its greater diversification and enhanced growth prospects.

Analysis

Energy Transfer (ET) and Western Midstream Partners (WES) both present as high-yield Master Limited Partnerships (MLPs) supported by stable, fee-based cash flows and strong balance sheets. ET offers a 7.5% distribution yield, while WES provides a higher yield of over 9%. Despite a lower current yield, ET's business model is characterized by superior scale and diversification, with over 130,000 miles of integrated pipelines servicing a broad range of commodities and customers, generating approximately 90% of its earnings from fees. In contrast, WES's operations are more concentrated in specific basins and heavily tied to Occidental Petroleum, which holds a 44.8% direct interest, creating notable customer and ownership concentration. Financially, both entities are sound; ET's leverage is within its 4.0-4.5x target range with distribution coverage exceeding 2x, while WES's leverage is below 3.0x. However, their growth trajectories differ significantly. ET has committed $5 billion to capital projects this year, projecting accelerated earnings growth in 2026-2027 and supporting a 3-5% annual distribution increase, complemented by an active acquisition strategy. WES's growth is more modest, with a $625-$775 million capex plan for 2025 aimed at delivering mid-single-digit growth, positioning ET as the entity with a more robust and expansive long-term growth profile.

Key Decisions for Investors

• For investors prioritizing sustainable distribution growth and lower operational risk, Energy Transfer (ET) appears to be the more favorable option due to its superior diversification, larger scale, and a defined strategy for 3-5% annual distribution increases.
• Investors attracted to Western Midstream's (WES) higher current yield of over 9% must weigh this against the significant concentration risk associated with its reliance on Occidental Petroleum as a primary customer and controlling stakeholder.
• The choice between these MLPs depends on investment strategy: ET is better suited for those seeking a balance of current income and long-term growth fueled by substantial capital investment, while WES appeals more to investors focused on maximizing immediate passive income.
• Monitor ET's execution on its $5 billion in growth projects and M&A activity as key catalysts for its projected earnings acceleration in 2026-2027.
• Given both MLPs issue Schedule K-1 tax forms, investors should consider the potential tax complexities before initiating a position in either security.