The low interest rate climate has investors searching for income. Exchange traded funds that focus on master limited partnerships, or MLPs, can find a strong income while diversifying away from equities.
“MLPs operate under the “toll road” business model in the sense that they generate fee-based revenues, which gives them a risk/return profile that’s more comparable to a utility company rather than an energy producer or explorer ,” Stoyan Bojinov for ETF DB wrote. [MLP ETFs: A Pipeline for Yield to Your Portfolio]
The majority of MLPs are pipeline businesses, which earn stable income from the transport of oil, gasoline or natural gas. Energy MLPs are defined as owning energy infrastructure in the U.S., including pipelines, natural gas, gasoline, oil, storage, terminals, and processing plants.
Many MLPs screen companies first and basic criteria include a market cap greater than $3.5 billion, a dividend yield of more than 4%, and investment in companies that have healthy cash flow to continue ongoing distributions. [Yield Hunters Get More MLP ETFs]
Another advantage of an MLP is the tax treatment. MLP income is treated as “pass-through” income and is not treated at a corporate rate. MLP owners only pay taxes on their percentage of ownership, and therefore eliminate the possibility of double taxation.
As the possibility of a low-interest rate environment is possible through 2015, according to Wall Street analysts, the search for yield is not expected to dwindle anytime soon. [High Income MLP ETF Launches]
ETFs for MLP exposure:
- JP Morgan Alerian MLP Index (NYSEArca: AMJ) yields 5.34%
- ALPS Alerian MLP ETF (NYSEArca: AMLP) yields 6.02%
- Exchange Traded Concepts Yorkville High Income MLP ETF (NYSEArca: YMLP) yields 8.49%