Why Some MLPs Could Still Be Attractive—Despite Market Uncertainties
Alerian MLP Index yield
MLPs (master limited partnerships) continue to be a top investment option for income investors after June 2017 due to their stronger yields. The Alerian MLP Index (AMZ) is currently trading at a yield of 7.13%, while the SPDR S&P 500 (GSPC) (SPX-INDEX) is trading close to 2.02%. The SPDR S&P 500 ETF (SPY) and the Alerian MLP ETF (AMLP) track the performance of SPX-INDEX and AMZ, respectively.
However, MLPs have unperformed the S&P 500 in terms of total returns. Including its ~7.2% yield and one-year price return of -4.5%, AMZ returned almost 2.7% in June on a total return basis, while the S&P 500 Index returned 18.0% on a total return basis.
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Meanwhile, REIT (real estate investment trusts) and utilities, which are also considered income-generating investments, are trading at 3.9% and ~3.5%, respectively.
Notably, AMZ’s yield is above Bloomberg USD High Yield Corporate Bond Index (BUHY) yield of 6.08%. (For details on recent dividend yields of major utilities, check out Market Realist’s Inside the Top US Utilities’ Dividend Profiles.)
Remember, high yields from MLPs reflect strong distributions despite the current turmoil in energy prices. In 1Q17, 36 MLPs managed to grow their quarterly distributions, while nearly 48 kept their distributions unchanged. About 75.0% of MLPs have managed to keep their distributions growing or constant amid the current weakness in energy prices.
Westmoreland Resource Partners (WMLP), Navios Maritime Midstream Partners (NAP), and Teekay Offshore Partners (TOO) are all high-yielding MLPs that are now trading at 24.0%, 17.3%, and 16.9%, respectively. Please note that a high distribution yield generally reflects the high cost of capital and high risk.
Among midstream MLPs, American Midstream Partners (AMID), NGL Energy Partners (NGL), and Energy Transfer Partners (ETP) are trading at high yields of 12.7%, 10.7%, and 10.5%, respectively. But such high yields won’t be sustainable in the long run.