For bond investors and the bond portion of portfolios, it’s a tough time. Inflation and the looming possibility of multiple interest rate increases by the central bank next year have advisors hunting for alternative income for their portfolios; one of the best places to find potentially high yields right now and in 2022 is within midstream and energy pipeline companies, reports Barron’s.
The midstream sector took a big hit in 2020 but has since bounced back and has some of the highest yields in the market currently, while remaining attractively priced. While the industry does experience some volatility due to valuation concerns from investors worried about the long-term viability for fossil fuels, they remains a cornerstone of the energy sector for now and the immediate future.
What’s more, it’s an area of the market that is currently offering substantial yields, with companies such as Kinder Morgan (KMI), Enterprise Products Partners (EPD), and Magellan Midstream Partners (MMP) having yields anywhere from 6–9%.
“Midstream is on sale again,” says Greg Reid, the president of Salient Partners. “The fundamentals are strong. Volumes should grow next year.”
While the overall sector is down around 15% from October peaks, midstream operators are utilizing their free cash flow to buy back stocks and reduce their leverages. Because the majority of revenue from midstream companies is fee-based and comes from contracts that have inflation mechanisms built into them, midstream is able to be mostly insulated from the price movements of the products it carries (i.e. oil).
“The industry is getting balance sheets in order and offering double-digit free-cash-flow yields,” says Rob Thummel, a portfolio manager at Tortoise Capital Advisors.
AMLP Offers High Yields for Investors
The Alerian MLP ETF (AMLP) offers exposure to major midstream companies that are experiencing robust cash flow and increasing payouts to shareholders and currently yields nearly 9%. The fund seeks to track the Alerian MLP Infrastructure Index, a rules-based index that is float-adjusted and modified cap-weighted.
The index is comprised of energy infrastructure MLPs that derive most of their cash flow from the storage, transportation, and processing of energy commodities. AMLP invests at least 90% of its assets into the securities within the underlying index and is classified as a C-Corp for tax purposes, utilizing a 1099 for tax reporting.
Recent tax legislation means that individuals and some non-corporate investors qualify for a 20% deduction against the taxable income from direct investment into MLPs.
Western Midstream Partners (WES) is carried at a 10.37% weight in the fund, Enterprise Products Partners (EPD) is carried at 10.17% weight, and MPLX LP (MPLX) is carried at a 9.95% weight.
AMLP carries an expense ratio of 0.90% and has total net assets of $4.97 billion.
For more news, information, and strategy, visit the Energy Infrastructure Channel.