Energy Transfer's Preferred I: A 9.25% Dividend Machine or a Hidden Risk?

Action Alert! Energy Transfer LP (ET) just announced another quarterly dividend on its 9.25% Fixed-to-Floating Rate Preferred Series I—and investors should take notice. But here’s the thing: this isn’t just about a simple dividend check. This is a high-octane play on energy infrastructure, with twists and turns that could make or break your portfolio. Let me break it down.

First, the basics: The Series I Preferred Units pay $0.2111 per share every quarter, which translates to a 9.25% annual coupon based on their $9.13 liquidation preference. But here’s the kicker—the yield right now is 7.47%, thanks to the shares trading at $11.30. Why the difference? Because yields are calculated against current market prices, not the par value. This is a critical point: if the price of these preferred shares drops, that yield could skyrocket. But if rates rise? Well, we’ll get to that.

Now, let’s talk about what makes this investment unique. These preferred units come with conversion rights. Holders can swap them into common units of ET at a ratio of 2.07 common units for every 10 preferred units—but only if the common stock hits certain price targets. That’s a double-edged sword. If ET’s common stock soars, you could cash in. But if it tanks? You’re stuck with the preferred’s fixed dividend.

Let’s see how ET’s common stock has been performing: . If the trend is upward, that conversion clause becomes a goldmine. If not? It’s just a bond with a high coupon.

Another angle: These preferred units are cumulative. That means if Energy Transfer ever misses a dividend (knock on wood), those missed payments pile up and must be paid before any dividends go to common shareholders. That’s a big deal—it’s like a safety net for preferred investors. But here’s the catch: These units rank pari passu with ET’s other preferred shares. So if the company hits a rough patch, you’re in the same boat as other preferred holders—not ahead of them.

Let’s dig into the numbers. The Series I units were part of a merger with Crestwood Equity Partners, with 41.5 million units issued. That’s a significant chunk, but remember—these are perpetual securities. No maturity date means no call risk… unless Energy Transfer decides to refinance or call them. But given the 9.25% coupon, they might hold onto these as long as possible if rates stay low.

Now, the risks: Preferred stocks are subordinate to debt. If ET ever defaults, bondholders get paid first. Plus, if interest rates spike, the price of these preferred shares could plummet—because their fixed 9.25% becomes less attractive compared to new issues with higher rates.

But here’s the flip side: Energy Transfer is a cash flow machine in the energy sector. With demand for natural gas and crude oil pipelines, ET’s business is foundational. And with a 7.47% yield today, you’re getting paid handsomely to wait out market volatility.

Bottom line: Energy Transfer’s Preferred I is a high-octane dividend play with a conversion kicker. The 7.47% yield is mouthwatering, but you need to brace for rate risk and the whims of the common stock. For income hunters willing to bet on energy infrastructure’s staying power, this could be a “Buy”—but keep an eye on ET’s common price and the Fed’s next move. This is a trade that could pay off big… or leave you stranded if rates go haywire.

In the end, this isn’t for the faint of heart. But in a world hungry for yield, Energy Transfer’s Preferred I is a wildcat well worth drilling—if you’ve got the stomach for it.