Why MLP Yields Could Be Too Attractive to Resist
Alerian MLP Index yield
The Alerian MLP Index (AMZ) has outperformed the S&P 500 Index (GSPC) since the beginning of 2016, despite its lower price returns. This outperformance has been clearly due to the stronger yields of MLPs (master limited partnerships). 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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AMZ is currently trading at a yield of 7.5%, while the S&P 500 is trading at a yield of ~2.1%. REITs (real estate investment trusts) and utilities, which are considered income-generating investments, are trading at almost half the yields of MLPs—at 3.8% and 3.5%, respectively. These yields could be attributed to MLPs strong distributions despite the turmoil in energy prices.
MLPs generally distribute the majority of their internally generated cash flow as distribution to shareholders while depending on external borrowing for funding organic and inorganic expansions.
Ferrrellgas Partners (FGP), a retail propane MLP involved in supplying propane to US homes and businesses, has the highest distribution yield among MLPs. FGP is currently trading at 27.2%.
Midcoast Energy Partners (MEP), which provides natural gas processing and gathering services, is trading close to 20%. Bigger midstream MLPs Energy Transfer Partners (ETP) and Williams Partners (WPZ) are trading at high yields of 11.1% and 9.9%, respectively. But such high yields can’t be sustainable in the long run.