MLPs Are Still a Top Income Investment Option



Alerian MLP Index yield

Yields for MLPs have come down in recent quarters, driven by the slight recovery of investor confidence in the energy sector. That came on the back of the small recovery in commodity prices and the corresponding increase in drilling activity.

The Alerian MLP Index (or AMZ) was yielding 7.0% by the end of 1Q17, which is significantly lower than the same period in the previous year. However, the index continues to outperform other investment options in terms of yield.

The S&P 500 Index (or GSPC) (SPX-INDEX) was yielding 2.1% by the end of 1Q17. The Alerian MLP ETF (AMLP) and the SPDR S&P 500 ETF (SPY) (SPX-INDEX) track the performances of AMZ and GSPC, respectively.

REITs (IYR) and utilities (XLU), which are considered income-generating investments, are trading at almost half the yield of MLPs, at 3.9% and 3.6%, respectively. AMZ’s yield is above the Bloomberg USD High Yield Corporate Bond Index (BUHY) yield of 6.1%.

The high yields for MLPs could be mainly attributed to their strong distributions, despite the turmoil in energy prices and low valuations. Of the 113 MLPs, 37 managed to raise their quarterly distributions in 4Q16, and 62 of them kept their distributions unchanged.

High-yielding MLPs

Navios Maritime Midstream Partners (NAP), CVR Partners (UAN), and Sunoco (SUN) are high-yielding MLPs. Currently, they’re trading at 15.0%, 14.7%, and 13.7%, respectively. A high distribution yield generally reflects high risk and a high cost of equity capital.

Among the bigger midstream MLPs, EnLink Midstream Partners (ENLK) and Energy Transfer Partners (ETP) are trading at high yields of 8.4% and 11.7%, respectively. However, such high yields may not be sustainable in the long run.

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