Broadly speaking, the energy sector has been home to plenty of negative dividend action this year, but the midstream space, accessible via the Alerian Energy Infrastructure ETF (ENFR), was steady with regards to second-quarter payouts.
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 master limited partnerships but limits the tax hit from solely owning MLPs.
In the midstream space, most of the first-quarter dividend cuts, or the payouts delivered in the June quarter, came by way of smaller companies while many large-cap midstream players resisted reductions to dividends.
“While uncertainty remains and a recovery in energy demand is ongoing, the backdrop for second quarter dividend announcements in July and early August was much more constructive than for the first quarter,” writes Alerian analyst Stacey Morris. “Our expectations for second quarter midstream dividends were few, if any, cuts but also few examples of sequential growth. Actual second quarter dividend announcements were fairly in line with expectations with only one cut across the universe by a small MLP.”
Examining ENFR Dividend Capabilities
Additionally, the midstream space is usually more defensive and less volatile than other energy segments due to steady, reliable cash flows.
Of course dividend growth is meaningful, but against a challenging backdrop in the oil patch, it’s also meaningful that many large-cap midstream names were able to hold dividends steady in the first half of 2020.
“A steady quarter for payouts and an improving macro backdrop are positives for midstream and are helpful for restoring confidence in the space,” writes Morris. “Given cuts made earlier this year and firmer footing in terms of fundamentals, the downside risk for midstream payouts overall feels substantially lower yet yields remain stubbornly elevated.”
Still, with dividends cutting rampant across traditional energy assets, the midstream and ENFR offer signs of encouragement.
“Dividend cuts have been prevalent across the energy sector this year, with BP’s (BP) recent announcement of a 50% dividend cut perhaps the latest addition to a long list including Royal Dutch Shell (RDS-A), Halliburton (HAL), and many others,” according to Morris. “Within this context, it is reassuring to see only one cut across the midstream universe for 2Q20 and from a small MLP at that. Equity yields remain stubbornly high even as the risk of additional distribution cuts seems limited, though some unique situations continue to bear watching. The steady payouts in 2Q are positive, and ongoing stability will likely be conducive to attracting income-seeking investors to this space.”
Other MLP funds include the Global X MLP ETF (NYSEArca: MLPA) and the JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ).
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