Merck & Co. (MRK) vs. Energy Transfer (ET): Which Offers Superior Passive Income in 2025?

The quest for reliable passive income has never been more fraught with trade-offs. Merck & Co. (MRK), the pharmaceutical giant, offers a stable dividend but faces sustainability questions. Meanwhile, Energy Transfer (ET), an energy infrastructure titan, sits at the crossroads of AI-driven demand and geopolitical tailwinds. Let's dissect which delivers better value for income investors today.

The Merck Dividend: Stability with a Ceiling

Merck's dividend yield currently stands at 4.07%, slightly below its 2024 high of 4.26% but still attractive in a low-yield world. The pharma giant has increased dividends for 14 consecutive years, bolstered by a portfolio of blockbusters like Keytruda and its mRNA vaccine business.

But the cracks are visible. Its payout ratio of 327%—calculated as dividends divided by net income—flags a reliance on cash reserves rather than earnings. This metric has surged as R&D costs rise and patent cliffs loom for older drugs.

Investors are right to ask: Can Merck sustain this dividend if earnings stumble? The answer hinges on its ability to monetize new therapies like the recently approved Alzheimer's drug lecanemab. Without a major pipeline breakthrough, the dividend may plateau or shrink.

Energy Transfer (ET): The AI Energy Play with 7% Yield

ET, a master limited partnership (MLP) with a 7.1% dividend yield, offers a stark contrast. Its infrastructure network—spanning pipelines, LNG terminals, and power plants—fuels the very data centers driving AI's energy consumption. Consider these facts:
- AI's energy hunger: A single large language model consumes as much power as a small city. ET's pipelines supply natural gas to data centers in Texas and the Gulf Coast, where 70% of U.S. hyperscale data centers reside.
- Hedge fund darling: Institutions own 38% of ET's shares, with Blackstone and Morgan Stanley among top holders. Secretive funds are quietly promoting ET as a “debt-free cash machine” with $4.37B liquidity.
- Valuation upside: ET trades at 7.2x EBITDA, far below its 10-year average of 9.5x. Its “war chest” of $6.6B in cash and equivalents (30% of market cap) allows it to repurchase shares or boost dividends without debt.

Why ET's Dividend is Safer Than It Looks

Critics point to ET's MLP structure and cyclical commodity exposure, but three factors mitigate risk:
1. Diversified cash flows: No single business segment exceeds 33% of EBITDA, insulating it from oil price swings.
2. AI-driven demand tailwinds: Its $2.6B investment in the Cloudburst Data Centers project directly serves tech giants like Google and Meta.
3. Trump tariff resilience: Unlike China-exposed firms, ET benefits from U.S. energy independence policies. Its Gulf Coast LNG terminals are critical for exports to Asia, where AI infrastructure is booming.

The Choice: Pharma Stability vs. Infrastructure Growth

Metric	Merck (MRK)	Energy Transfer (ET)
Dividend Yield	4.07%	7.1%
Payout Ratio	327% (unsustainable?)	44% (cash-covered)
Earnings Growth	Flat to 3% (2025E)	8-10% (via LNG/infrastructure)
AI Exposure	None	Direct via data center fuels
Valuation	Overvalued (25x P/E)	Undervalued (7.2x EBITDA)

Investment Thesis: ET Outperforms for Passive Income

While Merck offers a “bond-like” dividend, its high payout ratio and stagnant growth make it vulnerable to earnings misses. ET, despite its MLP complexity, provides:
1. Higher yield with margin of safety: A 7.1% dividend is 75% larger than Merck's and backed by cash flows, not earnings.
2. Structural growth: AI's energy needs are a secular trend, not a fad. ET's infrastructure is irreplaceable in the $1.2T global data center market.
3. Hedge fund validation: Institutions are accumulating shares, signaling confidence in its 2025 EBITDA guidance of $16.3B.

Actionable Strategy

• Buy ET: Target the June 2025 dip below $18/share (current price ~$19.50). Aim for a 6% yield entry point.
• Avoid MRK: Unless you're willing to pay a 25x P/E for pharma's beta.
• Monitor risks: ET's MLP tax form (K-1) complicates taxable accounts. Pair with a tax-advantaged brokerage.

Conclusion

In an era where AI's energy appetite is rewriting infrastructure demand, Merck's 4% yield feels quaint. Energy Transfer's 7% dividend, paired with its role as the “plumbing” for the AI revolution, offers safer, scalable income. Investors chasing passive returns should prioritize ET's combination of yield, growth, and macro tailwinds over Merck's dividend-laden stagnation. The future belongs to those fueling the machines of tomorrow.