Investing in midstream master limited partnerships (MLPs) can provide portfolios with a wide variety of benefits beyond exposure to the energy industry.
Stacey Morris, VettaFi's head of energy research, participated in VettaFi’s recent 2024 Alternatives Symposium. During the event, she discussed MLP investing and how it can enhance portfolios.
Potential Tax Benefits
To begin, Morris highlighted how MLPs can be viewed as an alternative investment strategy. She discussed the special tax treatment MLPs receive as pass-through entities. MLPs avoid the double taxation associated with C-Corp dividends. Direct investment in MLPs comes with a Schedule K-1 for tax purposes.
This tax benefit and related Schedule K-1 is “the primary reason you're probably not going to find MLPs in broad market indexes,” according to Morris. With an MLP ETF, investors needn't worry about a Schedule K-1; they will receive a Form 1099. There are only a few MLP-focused ETFs. The Alerian MLP ETF (AMLP) is currently the largest and most liquid MLP ETF.
See More: ETFs, CEFs & More: MLP Investment Products Evolve
Tax benefits aside, Morris also noted that MLPs have a lower correlation to equities and other traditional asset classes. That's typical of alternative investments and provides diversification benefits.
Growing Dividends Enhance Healthy Yields
Investors seeking dividend growth can also use MLPs to bolster their portfolios with potential yield. As an example, Morris mentioned that the Alerian MLP Infrastructure Index, AMLP’s underlying index, was yielding above 7.5%, as of May 30, 2024.
She noted that MLP companies aren't spending as much on new projects as they have in the past but are reaping the cash frows from existing projects: “These companies have already used excess cash to improve their balance sheets and reduce leverage, so they’re in a good position now to use excess cash and return it to investors.”
Defensive Energy Exposure
MLPs can also be used for more defensive energy exposure, according to Morris. She added that MLPs provide services for fees under long-term contracts that often have inflation adjustments built into them, keeping cash flows stable and resilient during periods of inflation.
Looking ahead to the second half of 2024, Morris remained optimistic on how MLPs will perform. She predicted companies would continue to execute well, providing dividend growth and potential buybacks. “There's a very good chance that we'll see upward revisions for financial guidance this year, given the stronger macro environment that we've had,” Morris added.
Vettafi.com is owned by VettaFi LLC (“VettaFi”). VettaFi is the index provider for AMLP, for which it receives an index licensing fee. However, AMLP is 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.
For more news, information, and analysis, visit the Energy Infrastructure Channel.
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