MLPs/energy infrastructure investments can fill a few different roles in client portfolios.
The segment can be used to enhance yield in an income sleeve. It can also be used as part of a real assets allocation to serve as an inflation hedge. Additionally, MLPs/energy infrastructure serves as a portfolio diversifier , as the segment has a lower correlation to other asset classes.
However, a recent poll from VettaFi showed most advisors allocate to MLPs/energy infrastructure for the segment’s generous income. When asked how they primarily use MLPs/energy infrastructure in portfolios, over 40% of respondents said income, according to 2024 Midstream/MLP Outlook: Can the Positive Momentum Continue? (Date: January 10, 2024. Sample size: 134 respondents.)
MLPs or energy infrastructure companies aren’t intended to be used as a fixed income substitute. However, they work well as a complement to an income portfolio. The segment tends to provide more generous income than what investors will find in other equity income investments or bonds.
The underlying index for the Alerian MLP ETF (AMLP) was yielding 7.6%, while the underlying index for the Alerian Energy Infrastructure ETF (ENFR) was yielding 6.4% as January 9. AMLP and ENFR are each yielding in line with their three-year averages.
Furthermore, midstream yields are not sensitive to the Fed’s actions or interest rate movement. This means AMLP and ENFR have the potential to provide attractive income throughout various interest rate environments.
Expectations for Dividend Growth in 2024
Most MLPs/energy infrastructure companies remain focused on generating free cash flow and returning cash to investors through dividend growth and opportunistic buybacks, according to Stacey Morris, head of energy research at VettaFi.
See more: “VettaFi’s Head of Energy Research on 2023 Highlights and Outlook for Midstream”
Several companies have provided dividend guidance for 2024 or already announced higher payouts.
Earlier this week, Enterprise Produce Partners LP (EPD) declared its distribution for the fourth quarter of 2023, representing a 3% increase from the prior quarter.
For more news, information, and analysis, visit the Energy Infrastructure Channel.
vettafi.com is owned by VettaFi LLC (“VettaFi”). VettaFi is the index provider for AMLP and ENFR, for which it receives an index licensing fee. However, AMLP and ENFR are not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of AMLP and ENFR.