Summary:
- Looking at total returns for 2022 compared to the -18.1% loss for the S&P 500, income-focused equity investments generally held up well, except for REITs.
- MLPs provided standout performance in 2022, gaining over 30% on a total-return basis.
- Now that bond benchmarks are yielding nearly 5%, equity income investments are facing more competition from fixed income than they have in years. Closed-end funds, MLPs, and broader midstream stand out for offering yields comfortably above bonds.
With rising rates, persistent inflation, and both equities and bonds falling last year, 2022 felt like a particularly challenging year for income investors. Across-the-board gains for equity income investments in 2021 may have made the many losses seen in 2022 particularly disappointing. However, several income categories outperformed the S&P 500 on a total-return basis in 2022 and a few categories even ended the year in positive territory, led by MLPs. This note looks at 2022 performance for equity income investments and current yields.
Putting a tough 2022 into context.
Looking at total returns for 2022 compared to the -18.1% loss for the S&P 500, income-focused equity investments generally held up well, except for REITs. The chart below shows 2022 price return and total return for different categories of income-oriented equity investments. Meanwhile, investment-grade bonds and high-yield bonds saw losses of -13.0% and -11.2%, respectively, in 2022, still outperforming the S&P 500. For added context, the same chart for 2021 showed across-the-board gains, and even the worst performer of the categories below (closed-end funds) was up 15.5% on a total-return basis in 2021.
Looking at performance for each income category, the numbers vary widely. MLPs and midstream were helped by a robust backdrop for energy, which saw its second straight year as the best-performing sector. MLPs, represented by the Alerian MLP Index (AMZ), led the way with a 30.9% total return. Broader midstream, represented by the Alerian Midstream Energy Index (AMNA), gained 21.5% for the year.
Despite headwinds from rising interest rates, utilities benefitted from their defensive qualities in 2022. Utilities fell just slightly on a price-return basis but ended the year with a positive total return. The S-Network US Equity Sector Dividend Dog Index (SDOGX) similarly had a negative price return but just barely eked out a positive total return for the year. SDOGX deploys a “Dogs of the Dow” approach selecting the five highest-yielding stocks from ten sectors of the S&P 500 (real estate is excluded) and applying an equal weighting scheme. In 2022, SDOGX benefitted from its relative overweight to sectors like energy and utilities and relative underweight to information technology compared to the S&P 500, which is its starting universe.
Hit by rising interest rates, closed-end funds and REITs were clear performance laggards in 2022. Given the income contribution from CEFs, the total return was practically in line with the broad equity market. After being the best performer in 2021 with a total return of 42.3%, REITs erased most of those gains in 2022, falling by 25.0% on a total-return basis.
Putting yields in context.
With the context of 2022 performance, it is interesting to look at current yields. Now that bond benchmarks are yielding nearly 5%, equity income investments are facing more competition from fixed income than they have in years. Even with a significant sell-off in 2022, REITs were yielding 57 basis points less than bonds at year end. The yield on SDOGX was on par with bonds, but for investors looking for more income, midstream, MLPs and CEFs offer yields that are still comfortably above bond benchmarks. With weakness in 2022, the SNET Composite Closed-End Fund Index (CEFX) was yielding over 10% at the end of the year – more than double the yield on bonds.
Bottom Line:
Though it may be small consolation, income investors probably saw losses last year that were not as bad as the broader market. With bond yields rising, the number of equity income investments offering yields above bonds has clearly narrowed.
AMZ is the underlying index for the JP Morgan Alerian MLP Index ETN (AMJ), the ETRACS Alerian MLP Index ETN Series B (AMUB), and the ETRACS Quarterly Pay 1.5x Leveraged Alerian MLP Index ETN (MLPR). AMNA is the underlying index of the ETRACS Alerian Midstream Energy Index ETN (AMNA), and the ETRACS Alerian Midstream Energy Total Return Index ETN (AMTR). SDOGX is the underlying index for the ALPS Sector Dividend Dogs ETF (SDOG). CEFX is the underlying index for the Invesco CEF Income Composite ETF (PCEF) and the ETRACS 1.5x Leveraged Closed-End Fund ETN (CEFD).
Current Yields vs. History
Energy sector equities were a haven in a year of challenging market conditions, with the average total return across the Alerian Energy Infrastructure index suite above 25%. Apart from AMEI, which has a yield above its 10-year average, yields in the energy infrastructure space are below their historical averages.
Midstream/MLPs
Yields for the Dividend Dogs index suite ended the year above their five-year averages. SDOGX saw the best performance of 2022, edging into the black with a total return of 0.16%.
Yields across the CEF indexes ended the year above their historical averages. On average the indexes were down over 20% on a total-return basis for 2022.
1 Calculated using a 37% federal tax rate. Source: VettaFi, Bloomberg as of December 30, 2022
Related research:
Income Opportunities: Midstream/MLPs Offer Dividend Growth
Income Opportunities: The Reliability of Midstream/MLP Dividends
Income Opportunities: Taking Stock as Fixed Income Yields Rise
Income Opportunities: CEFs and Rising Rates
Income Opportunities with International Equities
SDOGX Fetches Higher Yields and YTD Outperformance
Income Opportunities: MLPs, CEFs, and Return of Capital
Income Opportunities: Finding Income in an Inflationary Environment
| Underlying Index | Associated Product |
| Midstream/MLPs | |
| Alerian Midstream Energy Index (AMNA) | ETRACS Alerian Midstream Energy Index ETN (AMNA) |
| Alerian MLP Index (AMZ) | JP Morgan Alerian MLP Index ETN (AMJ), ETRACS Alerian MLP Index ETN Series B (AMUB), ETRACS Quarterly Pay 1.5X Levered Alerian MLP Index ETN (MLPR); Available on the C8 platform |
| Alerian Midstream Energy Dividend Index (AEDW) | ETRACS Alerian Midstream Energy High Dividend Index ETN (AMND), Alerian Midstream Energy Dividend UCITS ETF (MMLP) |
| Alerian MLP Infrastructure Index (AMZI) | Alerian MLP ETF (AMLP), ETRACS Alerian MLP Infrastructure Index ETN Series B (MLPB); Available on the C8 platform |
| Alerian Midstream Energy Select Index (AMEI) | Alerian Energy Infrastructure ETF (ENFR); ALPS Alerian Energy Infrastructure Portfolio (ALEFX); Available on the C8 platform |
| Sector Dividend Dogs | |
| S-Network Sector Dividend Dogs Index (SDOGX) | ALPS Sector Dividend Dogs ETF (SDOG) |
| S-Network International Sector Dividend Dogs Index (IDOGX) | ALPS International Sector Dividend Dogs ETF (IDOG) |
| S-Network Emerging Sector Dividend Dogs Index (EDOGX) | ALPS Emerging Sector Dividend Dogs ETF (EDOG) |
| S-Network REIT Dividend Dogs Index (RDOGX) | ALPS REIT Dividend Dogs ETF (RDOG) |
| Closed-End Funds | |
| S-Network Composite Closed-End Fund Index (CEFX) | Invesco CEF Income Composite ETF (PCEF), ETRACS 1.5X Leveraged Closed-End Fund ETN (CEFD) |
| S-Network Municipal Bond Closed-End Fund Index (CEFMX) | VanEck Vectors CEF Municipal Income ETF (XMPT) |
| S-Network Option Income Closed-End Fund Index (CEFOIX) | Available on the C8 platform |
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