September’s rate cut may be exciting for many investors’ equities holdings, but those same investors may feel less excited about the income on offer from bonds going forward. Falling rates, of course, lead to falling yields in numerous debt securities and offerings. For those investors whose portfolios are especially reliant on yields, it may be time, then, to look at other options to achieve their income goals. Midstream Master Limited Partnerships (MLPs) and corporations tend to offer more generous yields than typical fixed income benchmarks, and their yields do not fluctuate with interest rates.
See more: First MLP ETF Celebrates 15 Years of Income
The Fed has already dropped rates by 25 basis points (bps) and may even be looking at further cuts this year. This could be bad news, especially for investors close to retirement who tend to rely more heavily on bonds for income.
Rates and MLP/Midstream Yields
Enter midstream MLPs and C-Corps. The midstream category includes energy infrastructure firms that help connect energy supply and demand. These companies can offer investors appealing income, real asset exposure, and potential diversification benefits.
Digging into the data shows just how well midstream stacks up against other yield sources. The Alerian MLP Infrastructure Index (AMZI), tracked by the Alerian MLP ETF (AMLP), provides a strong example of the yields midstream can provide. Per VettaFi data, AMZI offers a 7.8% indicative yield as of September 23, measured by annualizing the last declared payout. The ten-year average yield for AMZI is 8.2%.
AMZI’s current yield not only outdoes the Bloomberg USAgg Index’s (LBUSTRUU) 4.3% yield, but also the Bloomberg US Corporate High Yield Index’s (LF98TRUU) 6.6% yield. To be clear, MLPs are not bond substitutes and have a different risk profile than fixed income. However, MLPs can enhance the yield of an income portfolio, while providing potential diversification benefits. For example, AMZI has a ten-year correlation with the Agg of just 0.1. Additionally, MLPs are not included in broad market indexes and may not be owned elsewhere in an equity portfolio.
For investors that prefer exposure to MLPs and corporations, the Alerian Midstream Energy Select Index (AMEI), which is tracked by the Alerian Energy Infrastructure ETF (ENFR), is providing a 5.3% yield as of September 23. AMEI is ~75% U.S. and Canadian midstream corporations and ~25% MLPs. AMEI’s ten-year average yield is 6.1%.
ETFs to Watch
Both AMZI and AMEI offer yields above other popular equity income investments. REITs, as represented by the FTSE NAREIT Real Estate 50 Index (FNR5), are yielding 4.0%. The S&P 500 Utilities Index (S5UTIL) offers a 2.8% yield, also per Bloomberg data.
MLPs or midstream may typically represent a 3-5% allocation in an income portfolio. Even with a small allocation, energy infrastructure can provide a meaningful boost to overall portfolio yields. AMLP and ENFR provide some helpful options to do just that.
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AMZI is the underlying index for the Alerian MLP ETF (AMLP) and the ETRACS Alerian MLP Infrastructure Index ETN Series B (MLPB). AMEI is the underlying index for the Alerian Energy Infrastructure ETF (ENFR) and the ALPS Alerian Energy Infrastructure Portfolio (ALEFX).
vettafi.com is owned by VettaFi LLC (“VettaFi”). VettaFi is the index provider for AMLP, MLPB, ENFR, and ALEFX, for which it receives an index licensing fee. However, AMLP, MLPB, ENFR, and ALEFX are not issued, sponsored, endorsed, or sold by VettaFi. VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of AMLP, MLPB, ENFR, and ALEFX.
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