Energy Transfer (NYSE: ET) is one of the largest, most diversified providers of energy midstream services in the country. Those assets generate lots of steady cash flow, about half of which the master limited partnership (MLP) distributes to investors. With its yield of over 8%, it’s a popular income investment.

Investors who like that income stream should check out fellow MLP Delek Logistics Partners (NYSE: DKL). The smaller midstream services provider currently yields around 11%. While it has a higher risk profile, it has done a terrific job increasing its monster distribution over the years.

The industry behemoth

Energy Transfer generates about $8.5 billion of distributable cash flow per year. The MLP distributes about $4.5 billion of that cash to investors each year. It retains the rest to fund expansion projects, enhance its financial flexibility, and opportunistically repurchase its common units. The midstream giant has a strong investment-grade balance sheet, backed by a leverage ratio trending toward the lower end of its 4.0 to 4.5 target range.

The MLP uses its financial flexibility to expand its midstream platform. The company expects to invest $2.5 billion to $3.5 billion into organic expansion projects each year; it’s planning to spend about $3.1 billion this year. It’s building new gas processing plants, additional export capacity, and natural gas power plants. These projects should come online through 2026, giving it lots of visibility into its ability to grow its cash flow. That helps support its plan to increase its distribution by 3% to 5% annually.

Energy Transfer is also a consolidator in the midstream sector. It bought Lotus Midstream for $1.5 billion in May 2023, closed its $7.1 billion merger with fellow MLP Crestwood Equity Partners in November, and acquired WTG Midstream in a $3.1 billion deal this July. Accretive acquisitions further support its distribution growth plan.

A hidden income gem

Delek Logistics Partners shares many similarities with Energy Transfer, just on a much smaller scale. Independent refiner Delek US Holdings formed the MLP to provide it with logistics services. It currently gets about half its revenue from its parent, with the rest coming from third-party customers. That customer concentration makes it riskier than the much more diversified Energy Transfer.

The MLP generates fairly predictable cash flow supported by long-term contracts with Delek US and other customers. It distributes the bulk of its cash flow to investors. It produced $67.8 million of cash in the second quarter, enough to cover its high-yielding payout by a relatively comfortable 1.32 times. Delek Logistics Partners retained the rest of that cash to fund expansion projects and strengthen its balance sheet. The MLP’s leverage ratio was 3.81 at the end of the second quarter, down from 4.34 at the end of last year. While Delek Logistics has a lower leverage ratio compared to Energy Transfer, it doesn’t have investment-grade credit, in part because of its smaller scale and less diversified business model. That increases its borrowing costs and risk profile.

Story continues

Delek Logistics is working to reduce its reliance on its parent by expanding its business to support more third-party customers. It recently agreed to buy H2O Midstream for $230 million to increase its ability to provide a full range of midstream services to oil and gas producers in the Permian Basin. The MLP also bought its parent’s stake in the Wink to Webster oil pipeline and approved building a new natural gas processing plant. These investments have the MLP on track to increase its third-party earnings to 64% of the total by the second half of next year.

The energy logistics company’s growing cash flow should enable it to continue increasing its distribution. It delivered its 46th consecutive quarterly increase in July. That payout was 1.9% above the prior quarter’s level and 5.3% higher year over year. With lots of growth coming down the pipeline from its recent investments, this MLP should have plenty of fuel to continue increasing its dividend.

An enticing option

Energy Transfer is a leader in the energy midstream sector. It generates lots of cash, which it uses to expand its network and distribution. That high-yielding and steadily rising payout makes it an ideal option for those seeking passive income.

Delek Logistics shares many similarities with Energy Transfer, though on a much smaller scale. It offers a higher yield and has plenty of fuel to continue growing its payout. Those factors make it an enticing option for income-seeking investors who are comfortable with its higher risk profile and investing in MLPs, which send a Schedule K-1 Federal Tax Form each year.

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Matt DiLallo has positions in Energy Transfer. The Motley Fool recommends Delek Us. The Motley Fool has a disclosure policy.

Like Energy Transfer? You Should Check Out This Ultra-High-Yield Dividend Stock. was originally published by The Motley Fool