Investors looking for income and some element of safety in the energy sector this year may want to consider the Alerian Energy Infrastructure ETF (NYSEArca: ENFR).

ENFR tracks the Alerian Midstream Energy Select Index (CME: AMEI). ENFR acts as a type of hybrid energy infrastructure ETF, which could help investors capture some of the high yields from MLPs but limits the tax hit from solely owning MLPs. Importantly, many midstream MLPs and energy infrastructure companies are working to deleverage their balance sheets.

“With 4Q19 earnings season just getting underway, only a handful of midstream companies have provided expectations for 2020 dividends,” said Alerian in a recent note. “Annual dividends correspond with a performance during the company’s fiscal year – not when the dividends are paid. For example, 4Q19 dividends refer to the dividends that will be paid in 1Q20 as a result of operational performance in 4Q19 (companies have recently been announcing 4Q19 dividends).”

Dividend Growth Coming

Midstream and MLP businesses are included in the ETF strategies because the segment is fundamentally related to the sector company businesses, can potentially increase yield generation and are historically excluded from S&P 500 and Dow Jones Averages, providing another layer of diversification benefits.

“Some of the largest US and Canadian midstream companies are guiding to robust annual dividend growth in 2020. After growing its dividend by 25% in 2019, Kinder Morgan (KMI) is planning another 25% increase in 2020, which would bring its dividend up to $1.25 per share on an annualized basis. The outsized dividend growth marks a recovery from KMI’s 2015 dividend cut,” according to Alerian.

MLPs primarily deal with the distribution and storage of energy products, so their business model is less reliant on the commodities market since MLPs profit off the quantity of oil and natural gas they are able to move around. Consequently, MLPs have historically shown a weaker correlation to energy prices over longer periods as MLPs act more like energy toll roads, profiting on the volume of oil moving through their pipelines.

“The midstream space can be divided almost equally into three groups – those with solid 2020 guidance, those with no guidance but a trend of growing, and those that have had steady payouts for some time,” notes Alerican. “Of course, a few names break the mold due to a recent cut (ENLC) or guidance to maintain the dividend (EQM, ETRN). Overall, it is encouraging to see many names growing their dividends sequentially, and companies that have cut in the past resume growth. Additionally, with midstream companies approaching a free cash flow inflection point, particularly in 2021, it’s possible that excess cash flow will drive further dividend growth.”

For more information on master limited partnerships, visit our MLPs category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.