Why MLPs’ High Yields Make Them Attractive
Alerian MLP Index’s yield
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.
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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.
High yielding MLPs
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.
MLP Treasury yield spread
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.