As investors, it can be difficult to escape from the lure of high yields. The idea of high and regular income looks attractive. However, investors should consider the risks associated with high yields. The significant fall in MLP stock prices, which erodes investors’ capital in many cases, has made investors wary of investing in the sector.
Spread over Treasury yield
As the above graph shows, the Alerian MLP Index offers a spread of ~5.2% over the U.S. 10-year Treasury yield. The spread is higher than the average spread of ~4.4% over the last ten years. As the green line in the above chart shows, the spread largely remained above the ten-year average spread over the last three years.
The turmoil in energy commodity prices, which started around five years ago, impacted energy sector stocks including MLPs. Falling stock prices pushed the yields on most stocks higher.
With stabilizing oil prices, the MLP yields have fallen from their 2016 highs. The yields are higher compared to 2014. Relatively attractive yields and expectations of stable energy commodity prices seem to be drawing savvy investors to the sector.
Although the operations remain the same, the sector has seen changes in corporate structures in the last few years. Midstream players including ONEOK (OKE), Targa Resources (TRGP), Kinder Morgan (KMI), and Williams Companies (WMB) have done away with the MLP structure. Recently, Antero Midstream (AM) joined the group.