The Alerian MLP Index (or AMZ) has been outperforming the S&P 500 Index (or GSPC) since the beginning of 2016, despite its lower returns. This has been due to MLPs’ stronger yields. The Alerian MLP ETF (AMLP) and the SPDR S&P 500 ETF (SPY) track the performances of AMZ and GSPC, respectively.
The Alerian MLP Index is currently trading at a yield of 7.5%, while the S&P 500 Index is trading close to 2.1%. At 3.8% and 3.5%, respectively, REITs and utilities, which are also considered to be income-generating investments, are trading at almost half the yield of MLPs. This difference could be attributed to MLPs’ strong distributions despite the turmoil in energy prices.
Sunoco LP (SUN), a retail and wholesale distributor of refined products, has the highest distribution yield among all of AMZ’s constituents. SUN is currently trading at 15.4%.
Midcoast Energy Partners (MEP), a midstream MLP but not a constituent of AMZ, is trading close to 21%. Some larger midstream MLPs such as Energy Transfer Partners (ETP) and Williams Partners (WPZ) are also trading at high yields of 11.8% and 9.1%, respectively. However, such high yields likely won’t be sustainable in the long term.
Currently, AMZ is yielding ~7.5%, while the yield on the US 10-Year Treasury is ~2.4%. In this way, AMZ is trading ~500 basis points outside of the Treasury yield.
Theoretically, risky assets should have more yield than risk-free assets, as investors require more return for the assumed risk. The continued fall in energy prices since mid-2014 has caused MLPs’ yields to rise independently of movements in Treasury yields.