It’s been a rough year for energy stocks and the corresponding exchange traded funds, including the ALPS Alerian MLP ETF (NYSEArca: AMLP), but it could be about time for income-starved investors to revisit master limited partnerships (MLPs).
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.
Some of the components on AMLP, the largest MLP ETF, look buyable at current levels, including Enterprise Products Partners L.P. (NYSE:EPD).
“Yet, with a 11.5% forward yield, it may pay to buy now, and sit tight until shares bounce back to pre-outbreak price levels,” according to Nasdaq. “Sure, like with many midstream companies, the balance sheet contains a fair bit of leverage. But, as one commentator noted, this MLP is not overleveraged. Not only that, most of its outstanding debt is long-term, fixed-rate. With this in mind, investors should be confident the company can maintain its current high payout rate.”
Assessing AMLP Investment Results
AMLP seeks investment results that correspond generally to the price and yield performance of its underlying index, the Alerian MLP Infrastructure Index. The index is comprised of energy infrastructure MLPs that earn a majority of their cash flow from the transportation, storage, and processing of energy commodities.
Another AMLP holding that currently looks interesting is Magellan Midstream Partners, L.P. (NYSE:MMP).
“Magellan will produce enough cash flow this year to keep the current distribution rate as-is. But, besides producing stable distributions for income investors, there’s something here for those looking for gains as well,” according to Nasdaq. “With catalysts like the closure of several refineries potentially benefiting the MLP, improvement could be on the horizon. And with this improvement, expect shares to start recovering from today’s rock-bottom prices.”
Magellan Midstream and Enterprise Products combine for over 20% of AMLP’s weight.
Other funds with exposure to income-generating energy assets include the VanEck Vectors Energy Income ETF (EINC) and the Global X MLP ETF (NYSEArca: MLPA).
For more on cornerstone strategies, visit our ETF Building Blocks Channel.
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.
