MLPs trading at attractive yields

The Alerian MLP Index, a benchmark index for energy MLPs, currently has a yield of ~8%. With the ten-year Treasury yield is close to 2.9%, MLPs’ spread over the Treasury yield is nearly 5%. That’s higher than a ten-year average spread of 4.5%. Despite strengthening oil prices, the index is currently about the same level as it was two years ago.

Distribution cuts, high leverage, and commodity price exposure contributed to investors’ unease with this sector. At the same time, the ten-year Treasury yield crept up nearly 90 basis points to ~2.9%.

MLPs Offering Attractive Spread over Treasuries

As the above graph shows, MLPs’ spread over the Treasury yield has been 4%–6% over the last two years.

Top MLP yields

Enterprise Products Partners (EPD), Williams Partners (WPZ), Energy Transfer Partners (ETP), Energy Transfer Equity (ETE), and Plains All American Pipeline (PAA), the five largest MLPs by market capitalization, currently yield 6.8%, 6.5%, 12.6%, 6.2%, and 5.6%, respectively. We’ll analyze ETP’s high yield in a later part of this series.

In this series

In this series, we’ll look at some of the MLPs that are trading at significantly high yields. We’ll also look at the reasons behind the higher yields for selected MLPs and see what Wall Street analysts recommend for them. High yields are mostly associated with high risk. Investors expect to be compensated by a higher yield if they assume greater risks.

Next, let’s take a look at the top 20 oil and gas MLPs that are currently trading at high yields.

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